The Latest Reality Check on Debt

Debt Canadians' debt-to-financial assets ratio now exceeds that of all other OECD countries for which data is available.

That’s according to this new Certified General Accountants (CGA) study.

CGA’s report states that…

  • 20% of Canadians feel they have too much debt–versus 17% in 2007
  • 1/4 of respondents wouldn’t be able to handle an unforeseen $5,000 expense (The study didn’t note how many of these people had mortgages.)
  • A 2% mortgage rate increase would require a 9% to 11% reduction in discretionary spending among middle to middle-high income families.
  • 43% of Canadians are “concerned about their financial condition at retirement.” (The reverse mortgage industry will benefit from stats like this, as fewer seniors have sufficient savings apart from their home equity.)

This report comes on the heels of yesterday’s CAAMP survey, which estimated that 475,000 Canadians would be financially challenged if their mortgage rate increased to 5.25%. That’s on top of 375,000 others who are already finding it hard to keep up with mortgage payments.

There are 5.55 million Canadians with mortgages.

  1. I think it’s pretty obvious that the CAAMP survey results are severely disconnected from reality if you have the CGA report stating that average debt-to-income ratio is 144%. This is with record low interest rates that we will probably never experience again. The cold hard facts suggest that we’re in for a big drop in consumer spending in the next few years while people repair their balance sheets.
    Before anyone says “BOC will not increase overnight rates if we go back into a recession”. The truth is that BOC cares more about inflation rather than unemployment. Current inflation levels do not justify ZIRP rates which will prompt a move back to more normal levels. What’s the 50 year average? Around 8 percent. But most likely the interest rate will move quickly to a normal recession-level point after June which could be 5-6%. If someone has a better idea on that with a reference, it’d be greatly appreciated.
    Full CGA report is found here:

  2. Melanie or Rob, I think your mistaken on your first line of this blog comment. According to that CGA report Canada is 7th of 19 when it comes to debt-to-income ratios. Six other Countries have a lot higher debt-to-income ratios.
    From page 42 of report.
    Overall, Canadian households are not among the most indebted compared with some other OECD countries and their ability to manage debt fares well when assessed based on the debt-to-income ratio. For instance, among 19 OECD countries for which information is available, Canada’s debt-to-income ratio ranked seventh and was twice lower than that of Denmark, which leads the ranking in 2008. However, at least 12 other OECD countries have household debt-to-income ratios lower than that of Canada; some as low as 46% compared with Canada’s 139% (top chart of Figure 8). The longer-term consideration (i.e. 1995-2008) shows that indebtedness of Canadian households had been increasing at a slower pace than in countries characterized by higher levels of household indebtedness.
    There is a graph on page 43.
    When it come to debt-to-assets Canada is first, but with a caveat.
    From Page 42 again.
    Information on debt-to-assets ratio is available for only 10 OECD countries and does not allow for objective comparison. However, when household indebtedness is measured as a ratio of consumer debt to financial assets, it becomes clear that Canadian households rely much more heavily on consumer credit than their counterparts in other countries. In fact, Canada ranks first in terms of consumer debt-to-financial assets when compared with 20 OECD countries for which data is available (bottom chart of Figure 8). Unlike Canada’s debt-to-income ratio, which was escalating at a somewhat slower pace than in other countries, Canadian households expanded their consumer credit at a rate similar to that in other countries. This explains well why Canada’s ‘leading’ position has been a long-term trend.
    It’s funny how every MSM news story and by means of using it as a source, blogs have this wrong. Guess that’s what you get when blogs start using the MSM as a source and not the actual source as a source.
    There is one blog out there, the Edmontonhousingbust blog, that has actually wrote that the $41,740 of household debt (which they think is only consumer debt) does not include mortgage debt, but in the CGA report it clearly states that the $41,740 is household debt which includes mortgage debt. I sent this blog a similar comment but they choose to ignore it. I guess there are some blogs that really do have an agenda. What is the blogosphere coming to. LOL…

  3. That’s a good point, DaBull
    I think we need a bit more accountability in terms of information being spread out in the public as well as the blogophere.
    I understand that everyone has their bias but publishing articles on an web blog doesn’t relieve you of due diligence in checking the facts.
    Credibility shouldn’t be compromised for shock factor because we all know what happened to the boy that cried “wolf”.
    Overall, I think the report suggests that Canadians on average have binged on debt in a recessionary period at which is alarming to the least. Instead of chastising the average Canadian consumer (who are fairly ignorant) maybe we should put more pressure/criticize Canadian media to educate the public on financial issues. Furthermore I believe our schools should really begin to push basic household finances. I know I sound a bit naive that this could actually come to pass but this is definitely a problem that needs to be fixed.

  4. Speaking of accountability on blog comments, when was the last time you looked at the school curriculum, Gary?
    There is currently a tonne of work being done on financial literacy both within the educational system and outside of it.
    Minister of Finance’s task force on financial literacy
    Alberta’s “Living Literacy” initiative, which has a large focus on financial literacy and household budgeting.
    Junior Achievement’s Financial Literacy program for Grade 7&8 students.

  5. While I strongly support greater financial literacy in schools (which is already happening), I find it a bit concerning that we should expect schools to be the primary teachers of household finances.
    One would think that households would be in the best position to teach household finances, since they are the ones that have the opportunity to provide money and model spending/saving behaviour. Classroom simulations can only go so far — it is one thing to introduce the concept of interest payments, but it is quite another to actually have to pay them.
    Parents need to step up to the plate — not just teachers. In too many households finances are an off-limits topic.

  6. Hi DaBull,
    Thanks for pointing that out. You’re absolutely right. “Income” should have read “financial assets” in the first line and has been corrected. We did go through the report, which is how the bullet point figures were obtained. But, for some reason, that first line stuck from this CTV Story (where we first heard about this report).
    We’ll be trusting the MSM a little less going forward. :)
    There were a few other points from the report of interest:
    * “The two main indicators of household indebtedness – debt-to-income and debt-to-assets ratios – deteriorated significantly in the past two years…”
    * The “mortgage-to-residential assets indicator to 65.4% at the end of 2009, a level much higher than the 55.0% average observed between 1990 and 2007”
    * “The decline in borrowing rates and the effective interest paid did not help households to reduce the share of their income dedicated to debt servicing.”
    * “When household indebtedness is measured as a ratio of consumer debt to financial assets, it becomes clear that Canadian households rely much more heavily on consumer credit than their counterparts in other countries.”
    Long-story short, there’s a debt problem among a fair-sized portion of our population. From a mortgage perspective, lenders will probably be watching debt ratios a bit more as news like this perpetuates–perhaps making fewer TDS exceptions, for example, until things improve.
    Anyway, thanks again DaBull. Cheers for now,

  7. I’m not arguing that debt has increased significantly, I think everyone knows that. I just wanted the error fixed because I know we have a large number of people who only read either just the headline or at most the first paragraph and think that’s what the whole story is about. They never read “the rest of the story”.
    I had a friend send me this story a couple of days ago and he couldn’t understand how a person could pay 144% more than they make. I had to explain to him that this number is arrived at by taking total household debt (which includes mortgages) and divide it by the number of poeple in Canada. He actually thought poeple were paying 144% more than they were making each year. So I had to tell him, I think only the Government can do that for any extended period of time. Yes, some people can spend more than they make but only for a short period of time and then they usually have to declare bankruptcy or win the lottery.

  8. Couldn’t agree more. It should start when you first give your kids an allowance. Tell them that they have to keep records on what they save or spend it on, otherwise no allowance.
    Plus teaching the kids about finances may also help some of the parents out there on that subject.

  9. “I think everyone knows that.”
    I’m not so sure “everyone” does know how bad our debt is getting. If they do then they definitely don’t understand the repercussions of it. Otherwise debt levels would not be relentlessly climbing into the stratosphere.

  10. Well it’s possible that NOW things are starting to change provincially but as far as I know in Ontario, I haven’t heard of any new changes to the curriculum where household finances are tied to math or early business study.
    I graduated highschool in 2003 so in fairly recent terms I can say that zero attention was paid on responsible fiscal spending. Its possible in the last 7 years there’s been changes but I’d certainly be surprised to find out that is has.
    True that parents should be responsible enough to teach their kids values like responsible debt management but what happens in the case where parents are blind to those issues. How can we have the blind leading the blind? I understand that there’s a line between telling people how to spend their money and social engineering a certain mindset. But if the facts are laid out clearly for students I’m sure that most of them can discern the right path. A simple chapter in planning which debts to clear out first, indicators of significant financial debt spirals and the implications of debt default could go a LONG way. All this simple information is clearly not getting to a big part of the ADULT population how is it logical for young adults to get to it?
    I don’t expect teachers to raise children and instill certain values but I do expect them to be taught the facts in black and white mathematical terms. At least they will be making educated decisions when coming out of university with a mountain of debt.

  11. I’d be VERY concerned if we are going to rely on Teachers to educate on Personal Finances to our children. Teachers already have pretty militant viewpoints on most things, the last thing I’d want is children of mine getting shoved politcal opinion (which finance inevitably linnks to) shoved down their throat. This should be left entirely to Parents, much like Religion and not something addressed in schools.

  12. I did read the article in the formation of this task force but really I have yet to see something substantial to appear. I tend to not give the feds any benefit of the doubt so until i see something concrete there are no points awarded for a press release.
    Junior Achievement’s program doesn’t seem to be part of the regular curriculum which is what I mentioned as part of the problem.
    I would consider the difference between curriculum-linked to actually part of the core curriculum as being two different things.
    It’s easy to test how effective this type of program in your province by just doing a simple survey amongst your kids or coworkes/friends kids and ask them simple financial concepts. If you find the majority of kids in your area are substantially knowledgeable in debt issues then you know that program is making an actual difference.
    The Living Literacy initiative sounds like a great program but just skimming through the pdf it didn’t seem like it was a program that has a heavy focus on finances and household budgeting. I could be wrong but it didn’t really seem like it to me. If it is heavily stressed then good for them. Is it only adults though?

  13. “… but as far as I know in Ontario, I haven’t heard of any new changes to the curriculum where household finances are tied to math or early business study . . . Its possible in the last 7 years there’s been changes but I’d certainly be surprised to find out that is has.
    Oh come on. Is it that hard to look things up?
    Link 1 for Ontario
    Link 2 for Ontario
    Link 3 for Ontario
    Link 4 for Ontario.

  14. I had already heard about the task force a few months ago but as far as actually seeing what is the changes I reserve my elation until they are in place and I see the facts of what is in the core curriculum. Am I impressed that it took a possible Depression #2 for them to start on this initiative? Nope.
    And as far as financial literacy constituting as brainwashing or social engineering, its hogwash if you’re just presenting cold hard facts. If people are that concerned they may as well protest against teaching history as we all know how that can be manipulated by the historians. Either way this is not a blog on social engineering its a financial blog and lets just stick with the facts.

  15. back of the napkin math:
    $41,740 / household
    12.5 million households (as of 2006 census)
    =~ $520B in total debt.
    average mortgage = 150k
    5.5 million mortgage holders (assume 1.5 mortgages per person i.e. joint mortgage vs single payer)
    =~ $550B of total mortgage debt.
    … there’s a disconnect there, no?
    either i’m overestimating the average mortgage (i actually think i’m underestimating it), or something’s off.
    any thoughts?

  16. An organization can put out a respectable and comprehensive 134 page report and yet it still does not address inequities across international lines and in fact, can’t.
    I did not read all 134 pages, did anyone? but I do not subscribe to media sensationalism and although I am concerned on some levels of what is in the report, I am not alarmed. For one, the report fails to fully assess impacts of median age of population, state of economy, government debt, tax levels, education levels, natural child birth rate or student debt to name a few.
    On the last point, student debt is reaching epic proportions in Canada. A burden that no one in Ireland, Scotland, Finland, Sweden or Germany to name a few countries shares since a third level education is essentially free in these places. Of course, our legions of mass in numbers, Yuppie voters would rather see Govt. money spent on health care since they already received their education. There is no shortage of hypocrisy on this issue!

  17. correction to above: it should say “1.5 persons per mortgage” not “1.5 mortgages per person”
    a reply of some kind would be nice.

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