Canadians have set a new record for household debt, a sign that many families are leaving themselves vulnerable to an economic shock.
The debt burden of Canadian households has surpassed levels of both the United States and the United Kingdom and, by at least one measure, they are hurtling toward those countries' peak levels of 2007, new Statistics Canada data show.
The concern is that any sudden negative event – such as a jump in unemployment, falling house prices or rising interest rates – could put many thousands of families in financial stress. The debt squeeze also suggests that consumer spending will be muted in the year to come, putting a damper on economic growth.
The ratio of debt to personal disposable income hit a high of 152.98 per cent in the third quarter from 150.57 per cent in the prior three months, Statscan said Tuesday. The report comes as Bank of Canada Governor Mark Carney is again sounding the alarm over swelling household debt. "Our greatest domestic risk relates to household finances," the central banker said in a CBC radio interview.
Roughly one in 10 Canadians is in a vulnerable financial position, Mr. Carney said – meaning that the cost of servicing their debt consumes more than 40 per cent of their income – "and that, historically, is where people start to have issues in making their debt service payments."
Household debt levels have become "excessive," said Derek Burleton, deputy chief economist at Toronto-Dominion Bank. "There's a growing vulnerability to an unanticipated event." Virtually all measures of household debt are "flashing warning signs," he added. Credit market debt, at a record 150.8 per cent, is approaching comparable levels to the U.S. just before the housing market crash.
Canada's economy is faring relatively better than its peers, corporate balance sheets are strong and its banking system is in far better shape. The risk is that strained debt levels put cracks in the system.
Ewan McCord knows first-hand about the spiral of debt. The Bedford, N.S., resident started racking up debt as a student, while acquiring a science degree from Saint Mary's University and a certificate in electronics and mechanics at the Nova Scotia Institute of Technology.
Easy access to credit cards worsened the problem – he received one form that granted him access to six retail credit cards – with interest rates of about 28 per cent.
Even after graduating and landing an entry-level job, his wages weren't enough to keep up with his cost of living. Rent and grocery bills started to pile up. By 2008, his debts totalled $32,000.
"I can't even articulate the feeling of dread and the stress that comes with that," said the 37-year-old, who now works as technical manager for a Xerox help desk. "You're trying to build a future but really going backwards."
Excessive spending is only part of the equation. On the other side of the ledger, Canadians are facing falling real wages and job creation that has stalled, on top of tumbling stock prices and a drop in the value of pension assets.
Indeed, that's one reason TD's Mr. Burleton thinks Canadian debt levels will rise further, even as the rate of debt accumulation slows.
Per capita household net worth sank to $180,100 from $184,700 in the second quarter – the sharpest quarterly drop since the end of 2008, the statistical agency said.
Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada Inc., has seen the demographic profile of his clients shift this year. The average age has crept up – to people in their 40s versus those in their 30s, as this age group gets squeezed by caring for both aging parents and children.
Back in Bedford, Mr. McCord has restructured his life to whittle down debt. Frugality is the result – he's paying off his consolidated debts every month, and sticking to a monthly budget while forgoing any discretionary items.
It's particularly hard at this time of year, when pressures to spend are greater. "It's the holidays – and you want to get your family presents, and people want to travel with you and go on trips. These are things you're trying to make happen, or trying to back out of. It does weigh on you."
Talk to Globe and Mail personal finance columnist Rob Carrick about how to wrestle down your debt in 2012 during an online discussion at NOON (ET) on Thursday, Dec. 15.
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