What Crisis? Canadians Debate How Much Household Debt Is Too Much - 2/24/2005 - International Real Estate

Crisis? What Crisis? Canadians Debate How Much Household Debt Is Too Much
by Jim Adair

"Canadians have been operating and borrowing mostly in an environment of low and falling interest rates -- and that's precisely where the threat lies," says Tal. "Having been sheltered by cheap credit for half a decade, borrowers may have a false sense of confidence in their ability to finance their growing liabilities."

"The next economic shock, such as a sudden substantial rise in interest rates and/or economic slowdown would brutally expose those borrowers to a different reality. Heavy borrowing today means reduced economic flexibility tomorrow."

The Vanier Institute of the Family (www.vifamily.ca) agrees that households may have something to worry about. A report for the institute by Roger Sauve says total household debt is now equal to 121 per cent of disposable income, compared to 86 per cent in 1980. It says home ownership rates have declined for all household age groups except those 55 and over, and that household savings rates have dropped to "zero, zippo, nothing."

Tal and Sauve both point to flat wage gains as the culprit behind the problem. "The almost chronic inability of the Canadian economy to generate high-paying jobs is largely behind the structural slowing in income growth, which we believe is at the heart of the excess borrowing by households," says Tal.

Not everyone agrees there's a problem, however.

A recent report by TD Bank Financial Group economist Eric Lascelles says talk of a debt crisis is misinformed. "The share of personal income needed to keep a handle on debt interest costs was the lowest on record in 2004, which means that Canadians are not unduly burdened by their debt," he says. "The rising debt level has been more than offset by the growth in household assets. In fact, personal wealth rose by 10 per cent last year in Canada -- the fastest pace in almost a decade." He says the S&P/TSE stock index gained 12 per cent in 2004, and house prices rose an average of nine per cent.

While admitting that personal wealth will not continue to grow as fast as last year, Lascelles says the outlook is generally positive.

The Bank of Canada has been studying what would happen if interest rates were to rise, or if house prices dropped. It says a scenario of "cyclically rising interest rates should provide households with time to adjust their spending behaviour. Such an outcome should not significantly affect the ability of households to service their debts…" It says house prices are supported by positive economic conditions with "very few signs of speculative behaviour," which means "the possibility of a significant reversal in house prices in major Canadian markets is unlikely."

The Bank of Canada says about 70 per cent of household credit is mortgage debt, of which about half is insured.

If you're concerned that your personal spending is getting too high, the Canadian Bankers Association (www.cba.ca) has a checklist on its website to test your financial fitness. The more times you answer "yes" to the questions, the more you may have to worry about.

Some of the questions: Do you usually pay your bills late? Are you using more and more of your income to pay your debts? Are you paying your bills with money you had planned to use for other things? Are you paying only the minimum amount on your loans and credit cards every month? Are you at, or over the limit on your credit cards? Are you borrowing money or using credit cards to pay for things you previously bought for cash?

The CBA also has free booklets that provide budgeting charts and other sources for help, such as non-profit counseling agencies.

The first step in getting a grip on your finances is sitting down and figuring out exactly how much money you have, and where your money is being spent. You may find that there's no crisis, and that you just need to take control of your finances.