Many Canadians are in denial about their debt says the Certified General Accountants Association of Canada
(CGA-Canada). While only
14 per cent of Canadians admit their debt increased significantly over the last 3 years, in actual fact, household debt has been increasing annually by
4.7 per cent for the past 30 years –outpacing gains in personal disposable income, assets and the GDP.
Today,
CGA-Canada releases its report titled
Where Does the Money Go: The Increasing Reliance on Household Debt in Canada which reveals Canadians’ attitudes on saving, spending and their level of indebtedness.
“Because Canadians have easier access to credit and spend more on discretional goods and services, consumption rather than asset accumulation has taken over as the leading cause of rising debt - confirming some worrisome trends,” said Anthony Ariganello, CPA (DE), FCGA, President and Chief Executive Officer of CGA-Canada.
A consumer survey, commissioned by CGA-Canada, found that saving is not a priority for Canadians. One in five respondents could not handle unforeseen expenditures of $5,000. And 25 per cent do not engage in any type of savings activity, not even retirement savings. Figures show that the personal savings rate has been declining since the early 1980s dropping from its highest level of 20 per cent in 1982 to its lowest of 1.2 per cent in 2005. The decline in savings is attributed to:
- Housing value appreciation that boosts household net worth
- Low interest rate levels that make savings less attractive and borrowing costs easier to bear
- An aging population that triggers dis-saving of retirement funds
- Slow growth in personal income that leaves less money available after personal consumption
- Easier access to credit that lowers the need for a “saving cushion”
Housing equity is often considered a viable alternative to savings and one third of non-retired Canadians count on their home equity as a source of retirement income. Interestingly though, home equity per owner was 5 per cent lower in 2005 than in 1997.
And while Canadians worry that they won’t have enough money to retire, an increasing number – 20 per cent - are tapping into their RRSP savings prior to retirement, using funds primarily for day-to-day living purposes. “Canadians’ increasing indebtedness may leave Canada’s aging society sandwiched between having already committed yet unearned income to debt-service and the need to speed up the accumulation of pension funds for rapidly approaching retirement,” said Rock Lefebvre, FCGA, CGA-Canada’s Vice-President, Research and Standards.
Survey results also reveal that 25 per cent of Canadians did not think that an interest rate hike, lower housing prices, wages or reduced access to credit would negatively affect their financial well-being. This is disconcerting considering that the effect of a 1 per cent interest rate hike on a mortgage of $214,065 with a 5.5. per cent interest rate and 25 year amortization period would increase monthly payments from $1,307 to $1,434 – adding up to $1,524 in extra costs per year. “It is troubling that so many Canadians seem unaware of the potential impact these changes may have on their financial situation,” added Lefebvre. “Although the economy has certainly witnessed positive gains, Canadians should be mindful that no one is entirely certain of the timing of a negative shock, of its magnitude, and of the type of spill-over it can provoke”.
CGA-Canada suggests that individuals’ should rely on their personal circumstances and not solely on the rosy global economic outlook or their credit limit when deciding how much debt they can assume. For instance some Canadians are more exposed to income instability such as the workers in the troubled manufacturing sector and single parents, unattached individuals and the self-employed .The least wealthy 20 per cent of Canadians are also more vulnerable to economic shocks because they have almost no housing equity to back up their mortgage debt and no other assets to support their rising debt load.
“Many Canadians think escalating debt and lack of savings are no cause for concern in today’s favourable economic conditions and few seem to fully appreciate the harmful consequences of swelling debt into future,” concluded Ariganello.
About CGA-Canada
CGA is the fastest-growing accounting designation in Canada. The CGA designation focuses on integrity, ethics and the highest education requirements. Recognized as the country’s accounting business leaders, CGAs provide strategic counsel, financial leadership, and overall direction to all sectors of the Canadian economy.
The Association sets standards, develops education programs, publishes professional materials, advocates on public policy issues, and represents CGAs nationally and internationally. The Certified General Accountants Association of Canada represents 68,000 CGAs and students in Canada, Bermuda, the Caribbean, Hong Kong, and China.
For more information, please contact:
Taylore Ashlie
Director, Communications
CGA-Canada
Telephone: 604 605-5055
Cell: 604 307-0212
Email: tashlie@cga-canada.org
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