Canadians Dangerously in Debt
While we’ve been hanging around waiting for the mortgage rate situation to increase, for the new mortgage lending rules to come into effect, and HST to overwhelm us, we’ve been spending money. Lots of money.
According to a recent study released by CIBC that measured our capability, not confidence, in spending, it appears that we’ve been spending more than our personal financial situations will allow for.
Senior Economist at CIBC World Markets, Benjamin Tal, commented that despite high confidence, Canadians’ recent spending has not been supported by rising income levels. With disposable income on a downward trend, debt is replacing income “as a major driver of consumer purchases.”
While consumer attitude surveys tend to be subjective, Tal has developed a new measure called the consumer capability index that uses several factors to track household essentials. These factors include:
- debt-to-income ratios
- real income growth
- the long-term jobless rate
- personal bankruptcies
- comparing current levels to long-term averages.
As with most economic issues, it’s complicated. There’s a big difference between consumer confidence and the reality of what consumers are capable of spending.
In the meantime, household debt – mostly mortgage debt – is advancing at a rate three times faster than income. That’s not good, particularly with the gap between income and housing prices sitting at a 20-year-high. This will likely result in real estate markets stagnating or decreasing over the next couple of years as interest rates rise and house prices come down. It is expected that consumer spending in all areas will begin to stall over the next year.
The Bank of Canada is being asked to take homeowner’s vulnerability into account when the key interest rate begins to rise later this year to ensure that there is a balance between what people have and what they can continue to afford.
