Where Is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge 

Backgrounder

Where Is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge captures the perspectives of Canadians on their levels of indebtedness and attitudes towards spending and saving. The key findings, based on research commissioned by CGA-Canada and administered by Synovate, establish a link between the worrisome trends revealed by Canadians and those evident from publicly available statistics.

We anticipate that this new report will be of significant value to the Canadian public, government and businesses.

Key Report Highlights

Household debt continues to rise, reaching a new high of $1.41 trillion

• Household debt in Canada reached $1.41 trillion in December 2009.
• If household debt was to be evenly spread across all Canadians, each individual would hold some $41,740 in outstanding debt in 2009, an amount 2.5 times greater than in 1989.
• The level of debt adjusted for inflation and population growth shows a continuous upward trend over the past two decades.
• The recent recession has had little effect on the rate at which households continued to take on debt.
• While growth rates of mortgages (secured credit) somewhat slowed over 2008-2009, consumer credit (debt typically not supported by appreciable assets) accelerated during most of that period.
• The share represented by revolving credit (personal lines of credit and credit cards) within total consumer credit issued by chartered banks grew from 21.1 per cent in 1989 to 77.7 per cent in 2009. Borrowing through personal lines of credit increased 25 fold within this period of time.
• Canada ranks first in terms of the consumer debt-to-financial assets ratio among 20 OECD countries examined. Such a ‘leading’ position has been a long-term trend.
• In 2007, those reporting decreased debt outnumbered respondents reporting increasing debt. The situation reversed itself in 2010, with 38 per cent of respondents saying their debt has increased, compared with only 33 per cent of those whose debt load decreased.
• The majority of individuals with increasing household debt were either very concerned (40 per cent) or somewhat concerned (46 per cent) with the fact that their debt has increased.
• Some 20 per cent of 2010 survey participants with debt said they have too much debt and have trouble managing it. This sentiment stood at 17 per cent in 2007.
• Households substitute consumption from income with consumption from credit. In 2008 and 2009, Canadians relied to a much greater extent on borrowed funds when purchasing cars and renovating their homes than in previous years. At the end of 2009 for example, some 75 cents was borrowed for each dollar spent on the purchase of new or used motor vehicles, whereas in mid 2008, households borrowed only 39 cents on each dollar directed to such purchase.
• Equity support of the household sector’s ability to incur debt for consumption purposes has eroded. By the end of 2009, owner’s equity dropped to 67.8 per cent from a peak of 70.8 per cent at the beginning of 2007.

Household balance sheet continues to deteriorate

• In 2007, very few respondents believed that the value of their assets had decreased over the most recent three years. In 2010, some 37 per cent of those holding mutual funds, stocks and bonds outside of RRSPs, and 31 per cent of respondents holding private pension assets gauged the value of their assets as decreasing. More than one quarter (27 per cent) of respondents felt that increased non-mortgage debt payments contributed to the rise in their expenditures.
• More than half (56 per cent) of respondents saw their income unchanged or decreasing, while the majority (85 per cent) of those whose income did increase said it did so only modestly.
• The debt-to-income ratio reached a new record high of 144.4 per cent at the end of 2009.
• Debt-to-assets reached 19.4 per cent at the end of 2009, while its average for 1990-2007 stood at 15.2 per cent.
• The degree to which residential mortgages were backed by residential assets continued to deteriorate over the past two years. This erosion pushed the mortgage-to-residential assets indicator to 65.4 per cent at the end of 2009, a level much higher than the 55.0 per cent average observed between 1990 and 2007.
• The true cost of supporting mortgage debt may be significantly understated because mortgage service ratios do not take into account such compulsory obligations as mortgage principle, property tax, mortgage insurance premiums and condominium fees. For instance, in Alberta, property taxes and condominium fees added some 27 per cent to an average debt service ratio for mortgages in 2008.
• The amount of outstanding consumer credit per each dollar of consumption of goods has increased significantly, suggesting that households are either using increasingly larger amounts of credit to buy the same quantity of durable goods, or that households may have increasingly adopted a practice of using consumer credit for purchasing non-durable goods.

Risks associated with rising financial indebtedness

• The banking sector may suffer significant loss of assets rising from the troubled household sector.
• Canadians are worried about their ability to support themselves in their retirement years. Almost half of respondents (43 per cent) are concerned about their financial condition at retirement.
• Rising financial indebtedness means that Canadians have little money left to save after making payments. 32 per cent of non-retired Canadians commit no resources to any type of savings. This will place a strain on Canada’s resources as baby boomers retire.
• The most vulnerable sectors of society – families and those with an annual household income of under $35,000 – are much more likely to have increased debt loads.
• Corporate profits dropped significantly during 2009 and while not directly linked to household debt, corporate profits influence employment and investment income.
• The real GDP deteriorated in 2009, essentially making each Canadian $1,520 poorer compared to 2008.
• Canada lost 319,000 jobs from June 2008 to December 2009, eroding some six years of job creation.

Magnitude of recent economic shocks on household finances

• Some 79 per cent of household assets may be affected by the changing dynamic of real estate or financial markets. The composition of household assets over time has become riskier, less diversified and somewhat less liquid. Stocks and mutual funds accounted for 19.2 per cent of all household assets in 2009, more than double when compared with the level seen in 1990. Holdings of lower risk cash and deposits, in turn, decreased to 12.3 per cent of household assets, down from 18.0 per cent in 1990.
• The average household portfolio may be expected to have an average return of 6 per cent; significantly lower than the 11 per cent annual return experienced in the five years leading up to the recession.
• Households’ exposure to rising interest rates increased. The proportion of household debt with variable rates increased from 14 per cent in 1997 to 25 per cent in 2007. This proportion is even higher for mortgages: in 2009, some 27 per cent of mortgages had variable-rate terms while another 6 per cent employed a combination of variable and fixed rates.
• Bankruptcies nearly doubled over the past two decades, increasing from 20.5 in 1990 to 39.0 in 2007. This rising trend persisted aggressively through the recent recession when consumer insolvencies skyrocketed to 56.6 insolvent individuals per 10,000 adult Canadians.

Significant regional differences

• Noticeable differences in debt service ratio existed among provinces in 2008. British Columbia stood out as a province with one of the highest household debt service burdens (9.9 per cent of disposable income). Ontario, Quebec, Alberta and Nova Scotia also had noticeably higher levels of debt-service burden compared with other provinces, whereas residents of Newfoundland and Labrador experienced the lowest (6.1 per cent) debt servicing costs in 2008.
• As few as 35 per cent of Quebecers, but as many as 47 per cent of British Columbians, told us their debt had increased compared with the Canadian average of 38 per cent.
• Some 41 per cent of all survey respondents felt they are wealthier today as compared with three years ago. The lowest level of enthusiasm was observed in British Columbia, where only 37 per cent of respondents reported an increase in wealth. Alberta, in turn, was the leading province with some 46 per cent of surveyed saying they are wealthier today.
• Job losses were unevenly distributed across Canada. While those employed in the Atlantic provinces slightly increased in 2009, residents of British Columbia and Alberta reported a 3 per cent-4 per cent decrease in the employment rate at the end of 2009, compared to December 2008. Similarly, the unemployment rate increased by two thirds in British Columbia and nearly doubled in Alberta, whereas it deteriorated only marginally in Saskatchewan.
• While Saskatchewanians enjoyed 14.4 per cent growth in their disposable incomes in 2008, incomes of households in Newfoundland and Labrador fell 0.8 per cent short of the level registered in 2007.
• Manitoba and Saskatchewan experienced a very moderate increase in consumer bankruptcies over 2007-2009; however, the likelihood of Albertans to declare bankruptcy was increasing twice as fast as the average Canadian.
• In 2008, Albertans were saving 13.7 per cent of their disposable income — a pace several times exceeding that of households in other provinces. British Columbians, in turn, were actively dis -saving, as their average outlays exceeded their disposable income by 3.4 per cent.

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