Tuesday , 21 May 2024

Canadian Households Extremely Vulnerable to Changes in Economy

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 [Canadian] economy’s two main domestic vulnerable areas are its overheated housing markets and high household debt.
  • 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

Debt by type

Source: Statistics Canada

What is driving this increase?

  • Overnight lending rate drops which
    • Fuels housing boom
    • Increased mortgages
    • Causes debt levels to rise

Overnight lending rate chart

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:

                                   1999                       2012

Debt by age

Source: Statistics Canada

Average household debt by province (2014):

Debt by province

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):

Financial sentiment survey

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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Related Articles from the munKNEE.com Vault:

1. Canada’s Housing Market Most Overvalued In the World – and Could Burst At Any Time!

Canada’s housing bubble has been a sight to behold. Home prices only dipped 8% when the US housing market crashed. Then it re-soared. Now, across the country, home prices are 26% higher than they were at the already crazy peak in 2008. In Toronto, they’re 42% higher! There is a major drawback Canada’s housing bubble beyond the fact that it will eventually crash with terrible consequences. Read More »

3. Implosion In Canada’s Housing Market Is Inevitable! Here’s Why

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4. Housing Bubble Threatens Financial Stability of Canada – Here’s Why

Over the last 14 years, house prices in Canada have increased by 150%, twice as fast as in the U.S…[and] far outpacing household incomes. Any increase in interest rates would prick the bubble, and its implosion would trigger all sorts of mayhem to the point that the Canadian government has expressed concerned that such an event would be a significant risk to the “stability of the financial system”. Read More »