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In 1990, Canadians owed $0.85 for every $1 of annual disposable income. Today that number has grown to a record $1.63. Meanwhile, Canadians are saving just 3.6% of their incomes today – a drop from 12% in 1990. Rising household debt levels have some sounding the alarm.
The above edited excerpts, and those that follow, come from an infographic which can be seen HERE. (It is part of a Globe series that explores the country’s growing dependence on credit — from the average household to massive institutions — and the looming risks for a nation addicted to cheap money. Join the conversation on Twitter with the hashtag #DebtBinge)
The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
- The International Monetary Fund reports that 7 countries today have household debt that may be unsustainable: the Netherlands, South Korea, Canada, Sweden, Australia, Malaysia, and Thailand.
- The McKinsey Global Institute reports that the total debt owed by all Canadians at the end of March was a record $1.8-trillion, with mortgage debt making up $1.29-trillion. (If you spent $1-million every day, it would take you 2,740 years to spend $1-trillion.)
Between 1999 and 2012, most types of debt rose, as follows:
1999 2012
Source: Statistics Canada
What is driving this increase?
- Overnight lending rate drops which
- Fuels housing boom
- Increased mortgages
- Causes debt levels to rise
Source: Statistics Canada
…The most important domestic financial system risk is the inability of highly indebted households to service their debt in the face of a sharp decline in their incomes, leading to a large and widespread correction in house prices.
Housing market is overvalued by 10-30%
The Bank of Canada estimated late last year that the Canadian housing market is overvalued by 10-30%.
12% of households are highly indebted
12% of households are “highly indebted,” or have a total debt-to-gross-income ratio above 250%, and that accounts for about 43% of Canada’s household debt.
Who are the 12%?
- They are younger (21-35)
- They have an average income of $65,000*
- 97% of them own homes
- Many live in B.C., Alberta and Ontario, where property values are the highest
*Despite the BoC findings, Ipsos Reid found that they had a higher household income ($107,204) than the general population ($70,917)
People under 55 carry the majority of the nation’s household debt but those over 65 – traditionally the most debt-free – are borrowing more. In 2009, 39% had no debt. That dropped to 33% in 2014.
Total debt by age group:
Source: Statistics Canada
Average household debt by province (2014):
Source: BMO Annual Debt Report
In spite of the above, it found that Canadians were surprisingly optimistic.
Percentage of households by province who think their finances will worsen (2015):
Source: CPA Canada
High levels of indebtedness continue to make Canadian households vulnerable to changes in the economy, yet few are taking the financial planning measures needed to prepare themselves for a potentially negative financial shock. A reality check is needed.
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