October 19, 2012

It drives me crazy to hear the shock in people’s voices about the high levels of household debt in Canada. Where has the media been? How many times have so many warned governments and the public about rising debt levels long before the credit crunch in the United States?

My jaw fell all the way open as I listened to CBC the other day and how one of their financial experts complained about how the cheap money over the last few years has allowed people to borrow through the roof. I couldn’t believe it. Where has she been?

I got the impression she was trying to make excuses for the federal government’s initiative on mortgage lending which brought the predictable outcome of slowing down real estate sales and closing the door on new home buyers this summer. The new rules limit the maximum amortization period on such mortgages to 25 Years, down from 30 years, and cap the amount that can be refinanced at 80 per cent, down from 85 per cent.

She also used the US credit crunch as an example of why we needed to take this kind of action without mentioning that the US credit crunch was fuelled by unparalleled fraud and poor lending restrictions which is not the case in Canada.

What really upsets me is how the government and many of the experts have for some reason consolidated mortgage debt with consumer debt. Why have they done this? Mortgages represent first of all an investment. Secondly, to get a true picture of the mortgage debt you should subtract the equity in the property to get a real figure. However, the current report only mentions the mortgage debt without acknowledging that it is secured by real estate.

Consumer debt for some mysterious reason has been kept on the sidelines. Insolvency practitioners and credit counsellors monitor the consumer debt indicators because this tells a different story. Consumer debt includes car loans, credit cards and consumer loans that have been rising each and every year since 1975. Numerous studies have shed varying shades of light on why individuals and families have been borrowing. One major cause has been incomes for the middle and lower income groups have not kept up with inflation and taxation over the last 20 years.

The cost of raising children has frequently been identified as expensive and troublesome for the cash strapped middle class that has resulted in increased consumer borrowing to make ends meet.

Transportation costs are a third huge expense for individuals and families when car loans, monthly car payments, car insurance, gas, parking and maintenance are included. And, there is usually more than one car in today’s dual income families. Next we will have to add the Toll’s on the bridges. For some families this may be the final tipping point for their finances!

Food, utilities, internet, almost every category of expense in the family budget causes pressures that frequently end up on some type of credit instrument or credit cards.

My question is this. What do you mean household debt is the source of all trouble? When, in fact, people have been subsidizing their incomes with consumer credit for at least two decades while governments have looked the other way. The middle class has increasingly become impoverished. Individuals and families have also been borrowing consistent with the values of a credit society – believing that debt is not bad – that deficit spending is socially acceptable – buy now pay later.

Here are the consumer debt (excluding mortgages) figures.

Consumer Credit (excluding Mortgages) Statistics as reported by the Bank of Canada

1975 $23-billion
1985 $58-billion
1990 $98-billion
1995 $116-billion
2000 $187-billion
2012 $486-billion

You see, how could a financial expert be shocked with the historical and cultural growth of consumer debt in Canada?

It’s long overdue for governments to take action against the exorbitant interest rates charged on a wide number of credit cards and consumer loans. This would increase the cash flow for middle and lower income families and allow people the prospect of becoming debt free. It would spell much needed debt relief to individuals and families.

Lower interest borrowing rates are an issue on one hand however, on the other hand high interest rates charged for credit card use is a whole other and even bigger issue.

If you need help dealing with high interest debt or are struggling to get out of debt contact one of our debt professionals today – we are here to help you!