The conventional wisdom seems to be that the financial situation of Canadian households is generally sound and certainly much better than that of our profligate and heavily indebted American neighbours. The Bank of Canada argued in its end of 2008 Financial System Review that “(O)verall, despite a modest deterioration, the financial position of the Canadian household sector remains relatively positive.” ( p.21) The 2009 Budget displayed a re-assuring Chart showing US household wealth falling far more precipitously than in Canada. (Chart 2.5). And it is true that household debt as a percentage of after tax (disposable) income in 2008 was, at 138%, well below the 170% level of the United States. (National Balance Sheet Accounts. Statistics Canada Cat. 13-214-X p.14.) The don’t worry, be happy crowd also like to point out that the debt service ratio (the proportion of household income going to pay debt costs) has remained remarkably stable since 2000 at about 8%, and is likely to fall as interest rates hit historic lows.
And yet, the data show a striking increase in Canadian household debt since 2000 as consumer spending and the booming housing market fuelled by strong mortgage growth drove economic growth to almost the same extent as in the US. Between 2000 and 2008, total household debt rose from 40% to 50% of total national income and the savings rate – the amount of money households set aside – fell to a historic low of just 2%. Household debt as a percentage of after tax income rose from 97% in 2000 to 136% at the end of 2008. Over the same period, household debt as a share of household assets rose from 14% to 19%. The overall jump in debt reflected a big increase in both mortgage debt as many bought big houses with even biggger mortgages, and a major increase in consumer spending supported by growing use of credit cards and personal lines of credit (plus not inconsiderable items like soaring student debt.)
A new report from the Certified General Accountants Association of Canada, “Where Has the Money Gone: The State of Household Debt in a Stumbling Economy” paints a well documented but alarming picture of the hole into which many too many Canadians have fallen into as a result of slow wage growth and relatively easy credit. As they note, average debt figures (and lack of timely data) hide the fact that a lot of the growth in debt has been among those families which can least afford it. One feature of the past few years has been that, as in the US, those at the bottom of the income scale have found it easier to access consumer credit, and have become more reliant upon it..
The accountants figure that, between 2000 and 2006, total household consumer credit (which does not include mortgages) grew by 6.5% per year on top of population growth and inflation, with the fastest growth among lower income households, those with children and, what amounts to the same thing, younger families. Moreover, there has been a big shift from consumer debt paid off over a fixed term, like conventional car loans, to revolving lines of credit like credit cards and personal lines of credit, where only a small amount of the principal has to be paid off each month. 85% of indebted households are carrying credit card debt (which, of course, is carried at high interest rates relative to secured lines of credit.)
Another major shift, they say, has been to use credit to pay for day to day living expenses rather than just big ticket consumer durables. A household survey by the accountants association shows that 58% of hosueholds with rising debt cited meeting day to day living expenses as the main reason for their predicament. More than one in five households (21%) say they have too much debt and are having trouble handling it; one in four (25%) say they could not handle an unexpected expense of $5,000; and fully 43% are not confident of an adequate financial situation at retirement.
Interest rates may be low, but many highly indebted households are experiencing lost jobs and reduced earnings at the same time that the value of their housing and financial assets are falling. The fact that consumer credit has continued to rise rapidly, at least until very recently, is less cause for celebration that our banks are sound, than cause for concern that too many people are meeting their basic living needs by expanding their borrowing.
The accountants’ conclusion is sobering: ” the rapidly deteriorating situation of household sector balance sheets should be viewed as an alarming matter (and) propsects of improving households’ financial situation in the near future are low.” (p.19.)
While they do not mention it, it is in this context that the growing call for legislated limits on credit card interest rates can be seen as a key issue.