January 05, 2017 | By: Laurie Campbell

Household Debt: Am I Crying Wolf or Will There Be Howling All Around?

It’s through the roof and ever skyward for household debt as borrowing grows faster than incomes in Canada, according to a December report from the Canadian Press (CP). Once again, our collective rate of borrowing reached a record high in 2016, and I’m worried about the financial security of millions of families should the nation’s economic circumstances present one or more financial shocks in 2017.

Citing Statistics Canada numbers, CP said that “the ratio of household credit market debt to adjusted disposable income crept up to 166.9 per cent in the third quarter, up from 166.4 per cent in the second quarter. That means, on average, Canadians owed $1.67 in credit market debt – mortgages, other loans, and consumer credit – for every dollar of disposable income.”

Do any of these alarming numbers promote even a smidgen of financial caution?

According to another December 2016 report from the credit reporting agency Equifax, “Average debt (excluding mortgages) increased by 3.6 per cent to $22,081 by (the end of the third quarter in 2016), compared to the same period (in 2015). As of the third quarter, Canadian consumers owed $1.702 trillion compared to $1.587 trillion a year earlier.”

Will any of these new numbers make consumers more cautious? At this point I have my doubts. For several years now, Ottawa and financial experts have been ringing alarm bells about the need to curb household debt in our nation, which now surpasses household debt in America when the 2008 crash hit. Few seem to care about the sort of serious debt problems we deal with everyday at Credit Canada as we help people beat debt through our Debt Consolidation Program.

According to Equifax, cheap credit – or low interest rates – is fuelling the borrowing.

Why all this spending when Canada’s overall job market continues to fall flat, with little change seen in pay year after year? Well, according to Equifax, the answer is simple: cheap credit – or low interest rates – is fuelling the borrowing, though falling oil prices also figure into the picture (think about the people of oil-rich Alberta who are borrowing just to survive these days).

I’m among those who have been warning about the dangers of all the debt spending, but I’ve done so in this space so often that I now suspect I’ll be labelled the credit counselling CEO who cried wolf. But just because the wolf hasn’t yet appeared, doesn’t mean he isn’t lurking in the dark woods, ready to pounce at any moment.

Even a small rate hike could bring debt trouble to the millions of Canadian families.

What might happen when the wolf leaps? This is my worry about negative financial shocks, such as higher interest rates for borrowing. Analysts say that even a small rate hike could bring debt trouble to the millions of Canadians who, as recent studies show, have overextended themselves financially and are living paycheque to paycheque.

Mortgage debt also needs attention. The availability in Canada of so much cheap money for so many years has made large mortgages all too tempting among those who set their dreams too high. Let’s just remember, we are still facing a national housing bubble that experts say could pop at any time. This would bring a huge drop in both the value of residential real estate and the net worth of millions of homeowners.

As I see it for 2017, the big question surrounding personal finance is this: will Canadian consumers awaken to the need for more caution and financial literacy about their borrowing, or will they go on with business as usual? If they choose the latter route, I predict that sooner or later there will be howling all around. 

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