The debt ‘crisis’ in Canada? If your paycheque is $100,000 plus, that means you
by Theresa Tedesco | Financial Post | May 8, 2015
They are professionals with university degrees, living in thriving economic regions like British Columbia, Alberta and Ontario, and earning at least $100,000 a year. They are also in hock for close to two times their annual salaries.
According to newly released data from Statistics Canada, 71 per cent of all Canadian families carried some form of debt in 2012 — yes, that includes mortgages, but it also includes a growing pile borrowed to buy cars, new kitchens and many of the fashionable material trappings of the modern middle-class lifestyle.
What that means is that to the vast majority this debt isn’t due to out-of-control credit cards or the working poor digging a hole just to pay for groceries. The Canadian debt nation is mostly made up of middle and upper earners.
It wasn’t always that way. Canada used to be known as a nation of savers: In 1982, we stockpiled 20 per cent of our annual income. But by 2014 that rate was down to 3.6 per cent – and at the end of last year our combined debt was $1.82-trillion, greater than the total value of what we produced in goods and services.
Today, households with at least $100,000 or more in total income account for 37 per cent of all debt in Canada. Households with income of at least $50,000 but less than $100,000 represent 38 per cent.
Even Americans, who we like to think are more spendthrift than us are managing to save more than Canadians. In fact, we are second only to Greece in the growth rate of household debt.
Not surprisingly this has spurred major international watchdogs like McKinsey, Fitch and Moody’s to call our consumer debt level “unsustainable,” and in “urgent” need of monitoring. But is our new relationship to debt really a crisis – or a new, necessary, normal?
More than ever before, Canadians are socialized into debt at an early age and are living with it longer, sometimes through an entire life cycle. By the time most young people graduate from high school, they’re already taking on student debt to get through college or university, have credit cards, and are responsible for car loans or leases.
And once they move on to mortgages they have so much debt they may carry it through to retirement: Statscan found that the number of families 65 and over carrying debt had jumped from 27 per cent in 1999 to a whopping 43% in 2012.
Craig Alexander, senior economist at Toronto Dominion Bank is matter of fact about that reality: “We made debt almost free,” he says. “We shouldn’t be surprised that debt has risen.”
But a lifetime of easy money isn’t just used for instant gratification. It’s noteworthy that borrowing for short-term spending is actually on the decline personal loans fell more than 16 per cent last year according to a report by the Royal Bank of Canada, and even credit card debt slowed in the last quarter of 2014, rising only 2.7 per cent.
Louise Wallace, who runs a marketing and design business in Salmon Arm, B.C. describes her family as middle class – “Every average that is out there, I’m pretty much right on it,” she says. But after going back to school in her 30s and becoming an entrepreneur she found herself so deep in debt that she ran a blog for a year called 365 Debt Defying Acts, with daily tips to help others (and herself) cut down what she owed.
Canadian culture has shifted to a point where debt is much more acceptable
“I certainly dispute this idea that my debt is a result of bad choices,” she says. “My debt is a result of trying to build a living. I’m not jetting off to Mexico, and buying big screen TV’s.
The vast majority of household debt is actually for what many of us consider the basics of middle class life: education, cars, and most significantly homes. Incomes haven’t gone up much, but prices have, so credit has filled the yawning gap.
The car loan business, for example, ballooned to $64-billion from just $16.2-billion seven years ago. Renovation spending has also been climbing for 15 years – hitting a record $63.4 billion in 2013, 3.7% of total Canadian gross domestic product. And installment loans – now available for everything from skidoos to funerals – have spiked.
Mortgage debt, however, is what is truly driving debt nation. As Jim MacGee, professor of economics at University of Western Ontario in London, explains, “The primary reason that household debt has gone up so much is because housing prices have risen so dramatically. It takes more debt to purchase the same house today than it did in 1999, because housing prices have increased more than the amounts that mortgage rates have declined.”
That’s obviously great news if you own a home particularly if you’re at an age where you can liquidate those assets and downsize in the near future. While some seniors carry debt into retirement, according to a study by the Bank of Montreal others now enjoy nine times more wealth than 25-34 year olds, up from a wealth gap of four times in the 1980s.
For many younger Canadians, the fear is that the gap will only get bigger, and houses more expensive. So they’re stretching their budgets on homes they might not otherwise feel they can afford, says David MacDonald, an economist with the Canadian Centre for Policy Alternatives. “It’s not worth saving up because you’d have to put off home ownership for much longer,” he observes.
Really, the only way for many younger Canadians to finance the middle class life they’ve grown up with is to borrow. “On average, younger Canadians are developing an awareness of debt by necessity, which is a new development that wasn’t there before,” says Paul Kershaw, professor at the University of British Columbia’s School of Population & Public Health.
Of course a life funded on borrowed cash has considerable risks. Consider that between 1976 and 1980, the typical 25- to 34-year-old working full time spent 38 per cent of their annual income on housing. From 2006 to 2010, the same group had to allocate 46 per cent of their annual income to pay the average mortgage, according to a research paper published by Prof. Kershaw.
That leaves a huge proportion of Canadians vulnerable to fluctuations in borrowing rates. Even so, experts do not see U.S.-style foreclosures if interest rates go up. They believe it would slow down the economy as more consumers skip purchases to pay off their houses but not spark a full-blown financial meltdown.
In fact, taking on some debt may be wise given the structural changes to our economy. We’ve stopped saving money to buy things the old-fashioned way and started to borrow at cheap rates because we’ve figured out that the same low interest rates that punish our bank accounts also give us enormous purchasing power.
Investment strategies have changed too: instead of “safe” places to park our money, like savings accounts or fixed-income GICS, we are investing our future nest eggs into residential real estate. It’s no coincidence that the national savings rate has dropped dramatically during the past 20 years as housing became an attractive investment. Consider that massive mortgage a new kind of forced savings for a society of debtors.
Meanwhile, structural change has also affected our psychology around money. Debt is no longer a dirty word. “Canadian culture has shifted to a point where debt is much more acceptable,” observes TD’s Alexander. Even declaring personal bankruptcy, which he said would have been a humiliating last resort in the 1970s, has lost some of its stigma.
“You can’t hide in shame,” says Wallace. “That’s what motivated me [to start a blog], because I realized that I wasn’t the only one, I’m average. And I find average very challenging. There must be hundreds of thousands of me trying to find a way to do it.”
That unprecedented approbation of debt also applies to carrying it through the life cycle. Our parents and grandparents took on debt to buy houses and cars with the intention of paying it down and off – eventually. Not many of us think that way anymore, especially not younger Canadians.
“It is rational for Canadians to carry more household debt,” says TD’s Alexander.
The bottom line: Going into debt is not about a “lesser work ethic, or poorer judgment with respect to the housing market” than our parents or grandparents, says Prof. Kershaw. “I don’t know how you escape becoming more comfortable with debt. Because that’s the marketplace we live in.”
Sure we’ve changed who we are a nation of borrowers, not savers. Now the challenge is how to manage a country that’s deep in hock — and not likely to climb out.