Household Indebtedness in Canada Climbing To New Heights

Household indebtedness in Canada is climbing to new heights! Why are Canadians acquiring so much debt and ignoring lessons from the USA’s sub prime debacle? Cheap, easy money is addictive! Besides, history would suggest that in future, people won’t own their actions.  When housing prices fall and interest rates rise, many people will use the victim card. They will blame financial firms, merchants, the one percent … everyone, but them.

Household Indebtedness Warnings

Let’s look closely at the size of this household indebtedness problem as reported over the past three years:

1. November 2012: Bank of Montreal reported that a small increase in interest rates would shock 72% of homeowners. Interest rates have fallen, not risen, so the shock is likely to be greater when rates rise. More people are exposed with mortgages they can’t afford.
2. March 2013: A highly publicized survey by the Canadian Institute of Chartered Accountants found 75% of “Canada’s top financial executives” believe high Canadian household debt is damaging the economy.
3. October 2014: Black Rock Survey showed Canadians spend 43% of their incomes on housing, third among twenty countries surveyed, behind The Netherlands and Sweden.
4. February 2015: Mckinsey Global Institute issued a report of debt levels in several countries and noted:
   

   Only in the core crisis countries—Ireland, Spain, the United Kingdom, and the United States—have households deleveraged. In many others, household debt-to-income ratios have continued to rise. They exceed the peak levels in the crisis countries before 2008 in some cases, including such advanced economies as Australia, Canada, Denmark, Sweden, and the Netherlands

5. March 12, 2015: Statistic Canada confirmed household indebtedness continued to rise. It reported credit market debt (household debt) to disposable income reached a new high of 163.3% in the fourth quarter of 2014.
6. May 2015: Prime Minister Harper joined the debt discussions and waffled. He encouraged people to “exercise caution in terms of their borrowing.”  Doesn’t he realize that the low interest rate policy is fuelling the hot housing market? It’s causing many people to buy homes they can’t afford. It’s sad to see several folks borrowing down-payments to buy their homes. They have not learned from the sub-prime disaster in the USA.

To be sure, ignorance is a key factor driving the rush to own homes. People believe owning a home is always better than renting. That’s an emotional view. People are trying to keep up with their neighbours. But that’s a losing deal. The neighbours debts keep rising too!

When interest rates rise, not if, many will realize they will be worse off than if they rented. This isn’t rocket science. Especially with low down payment mortgages, a small drop in the market price of a house will put the mortgage above the price of the house.

So, what can a prudent couple who wants to be good stewards do about owning a home today? Wait! Yes, wait until you have saved a downpayment that produces a mortgage that fits your budget and does not cause undue stress in the family.

Here are five simple suggestions as you grapple with buying versus renting a home:

1. Start living in a budget. Understand the differences between sacrificial, sustaining, and supplemental budgets. If you are using a sustaining or supplemental budget you might be ready to own
2. Become debt free
3. Learn about mortgages
4. List on one sheet, responsibilities and potential costs over five years of owning and renting
5. Seek God’s direction

Renting can be expensive, but your role is limited. Here is a question often overlooked: Do you want the owning responsibilities with negative equity — mortgage higher than the market price of the house?

Let’s reflect on what might happen with household indebtedness in Canada continues climbing to new heights. We must be patient. Owning a home we cannot afford could be your worst lifestyle decision. It is not a financial decision. It’s a lifestyle decision with lasting effects. Nobody is entitled to own a home. Think about this.

© 2015 Michel A. Bell