When Statistics Canada released some income numbers from the 2006 Census, many people in the middle class nodded their heads in recognition of something they already knew.
“Median earnings of Canadians employed on a full-time basis for a full year changed little during the past quarter century,” said the government agency, “edging up from $41,348 in 1980 to $41,401 in 2005 (in 2005 constant dollars).”
A strategy used by many to overcome their stagnant incomes has been to borrow to maintain their standard of living.
Interest Rates Set to Rise
Central bankers around the world are concerned about the rising levels of debt, both personal and national, and they are warning about the need to raise interest rates to control this. Even commercial bankers are pressing Ottawa to tighten the rules on mortgage lending over concerns too many people are getting in over their heads with debt.
Writing in the Globe and Mail (February 11, 2010) Rob Carrick notes that, “Four of every 10 first-time home buyers who arrange financing with mortgage broker Mike Loleski are putting down as little as possible and taking the maximum time to pay what they owe.”
When interest rates start to rise payments on these mortgages will rise to the point where some borrowers won’t be able to manage. The fear is that foreclosures will then increase and there will be a repeat of the market collapse that started in the United States in 2007.
Borrowing to Boost Stalled Income
Many of those already owning homes have been mining the equity in their properties; raising lines of credit with banks pledged against the increased value of their homes.
In May 2009, the Certified General Accountants of Canada (CGA) announced that, “household debt has reached an all-time high of $1.3 trillion in 2008,” and that “Canadian families are financing consumption activity with unearned money as they increasingly reach for credit to finance day-to-day living expenses.”
(In October 2009, the Bank of Canada said total household debt had risen to $1.4 trillion.)
Canadians Used to be a Nation of Savers
In 2008, each Canadian had a debt just a tad shy of $39,000 with, according to the CGA, the trend line rising.
Compare this with a couple of decades earlier. On December 6, 2004, Steve Maich wrote in Maclean’s magazine that, “In 1985, the average Canadian socked away 15.8 percent of his take-home pay.” Ten years later this savings rate had fallen to 9.2 percent, and “By 2003, the average Canadian saved just 1.4 percent of his pay.”
The Great Recession changed many things, including the savings rates of Canadians. In a special economics report (May 20, 2009), the Toronto-Dominion Bank said households have cut back on spending “and the savings rate rose to a six-year high of 4.7 percent by the end of 2008.”
Debt Levels Leave Families Vulnerable
But, increasing savings now might be too little and too late.
In March 2009, the Certified General Accountants of Canada released a report on a survey of households and their debt. The survey showed how Canadians are struggling to stay afloat financially.
Of those surveyed, 58% said their increased borrowing was caused by the need to raise money to meet day-to-day living expenses; this is up from 52% in 2007. Also, of those Canadians who are in debt, 85% of them have unpaid balances on credit cards. In addition, “The proportion of respondents with rising debt went up from 35 percent in 2007 to 42 percent in 2008.”
Bankruptcies on the Rise
The Office of the Superintendent of Bankruptcy Canada reported that in the twelve months up to September 2009, 148,373 Canadians went into bankruptcy. The website BankruptcyCanada comments on the trend line: “Over the last twelve months personal bankruptcies in Canada have increased by 36 percent. In the last three months they are up by 41 percent. In the last month they are up by 47 percent. Those ever-increasing numbers show that the financial problems of many Canadians are getting worse…”
And, according to the Certified General Accountants of Canada, “one quarter of Canadians would not be able to handle an unforeseen expenditure of $5,000, and 1 in 10 would face difficulty in dealing with $500 unforeseen expense.”
Sources
It’s not the Mortgages, it’s the Borrowers.” Rob Carrick, Globe and Mail, February 11, 2010.
“Bank of Canada Warns of Debt Peril.” CBC News, December 11, 2009.
“Canadian Household Debt Reaches $1.3 Trillion and Continues to Escalate.” Certified General Accountants Association of Canada, May 26, 2009.
"2006 Census: Earnings, Income, and Shelter Costs.” Statistics Canada, May 1, 2008.
Rupert Taylor - Rupert Taylor is the editor of a magazine that provides background to current events.
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