Canada's Condominium Magazine
Something here doesn’t add up. Canadians say that their top priority, over the past five years no less, has been to pay off their debt. And where has that debt gone in those five years? Up, of course. It seems that many indebted Canadians are like the overweight person who swears he wants to lose weight then sneaks out to buy more doughnuts.
Total consumer borrowing rose 1.5 per cent in the third quarter of the year, 7.4 per cent from a year ago. We owe over $1.5 trillion, most of it in mortgages. The latest report from Statistics Canada showed that our debt-to-income ratio was above 162 per cent, meaning that we owe more than we earn. What gives? Are we lying to ourselves about wanting to be debt free? Having a guilt reaction to the seasonal splurge we’ve just come through? Helpless?
Or perhaps we are saying what the pollsters and the banks want to hear? CIBC just released another Nielsen poll showing that Canadians’ top financial priority is to pay down their debt. The number of people saying this has been growing: for 2015, 22 per cent named that as the big issue they want to deal with; last year it was 16 per cent. The number of people who place importance on saving for their retirement has correspondingly fallen, dropping from 13 per cent to just 5 per cent for 2015.
Paying off debt becomes more important the older we get: twice as many in the 45–54 years of age group identified debt as their top issue, compared to last year. The same is true for people aged 55–64 years: twice as many as last year want to pay off their debt.
“Not only have Canadians told us debt repayment is their number one financial priority for five years running, for 2015 we see an even greater number of Canadians focused on better managing debt in the year ahead,” says Christina Kramer, Executive Vice President, Retail and Business Banking, CIBC. “While it is encouraging that paying down debt is important to Canadians, it is also important not to lose sight of longer term goals like retirement planning.”
Stay out of the danger zone
Does the strong expression of desire to pay off debt really mean something this time? Have Canadians heard the warnings coming from sources like the Bank of Canada and big credit rating agencies like Fitch, which declared Canadian consumer indebtedness to be unsustainable?
The Bank of Canada knows very well that its own policy of keeping interest rates low is at least partly behind the rising debt load of many Canadians. That debt is not spread evenly, however. Just 12 per cent of Canadians, those who are considered to be carrying excessive debts, account for 40 per cent of all household debt in Canada, the central bank says. That level of debt is defined as “problem debt” which cannot be paid off without major changes to a person’s lifestyle and financial circumstances. Some financial experts say that devoting more than 20 per cent of monthly income to debt repayment puts a person in the “danger zone.” Nevertheless, the average Canadian owes just over $20,000 on cars, vacations and shopping. Mortgage debt is not considered in this estimate, and collectively we owe over $1.17 trillion in mortgages.
At the same time, thanks to those low interest rates, fewer of us are having trouble keeping up with our debt payments. Default rates are at near record lows. The Bank of Canada repeatedly says that while consumer debt is a “vulnerability” in the economy, unless there is a global economic crisis like the one we came through in 2007, with falling real estate values and widespread unemployment, it is unlikely that the vulnerability will turn into a major liability.
Perhaps the best advice for anyone who is genuinely concerned about personal debt is to talk to a financial advisor.