Canadians households have become so financially stretched and hooked on debt to get by that, in just the past year, more than a third of us have found ourselves covering expenses by running up credit lines or credit cards, or even selling off investments and hitting up family members for much-needed cash.
That’s according to a new Manulife Bank survey, which also found that 14 per cent of those already stuck in a hole of debt have had to turn to more desperate measures in the past year — liquidating portions of their RRSPs or turning to high-interest payday lenders.
“It does appear there are a lot of people living on the edge,” said Rick Lunny, chief executive of Manulife Bank. And with the possibility of interest rate hikes, after years of historically cheap borrowing costs, there may soon be more people having to resort to more desperate measures.
“It is concerning,” Lunny said.
The blame, he said, appears in part to belong to the high price of houses in Canada’s major markets, which is causing mortgage payments to take up an ever-larger piece of family income, leaving less money for savings. Canadian homeowners carry an average of $175,000 in mortgage debt, with higher amounts exceeding $200,000 in Alberta and British Columbia, according to the Manulife Bank survey.
“We’re seeing that consumers may be keeping up with their mortgage payments, but what they may be struggling with is unexpected expenses and other living costs,” said Scott Hannah, chief executive of the Credit Counselling Society in Vancouver. “We’re seeing consumers who are offsetting those costs by taking on additional debt.”
The latest Statistics Canada census figures available show that more than a quarter of Canadian households were shelling out shelter costs at or above the housing-affordability threshold defined by the Canada Mortgage and Housing Corporation as 30 per cent of their income. That was in 2011; housing prices — fuelled by record low interest rates — have risen by double digits since then.
A recent report from the economics department of Bank of Nova Scotia said that, in the second quarter of 2015, Canadian house prices rose at the fourth-fastest clip among 23 nations.
Those same low interest rates have helped drive up Canadians’ debt-to-income ratios, now sitting at 164.6 per cent, Statistics Canada reported in September. Fifteen years ago, it was below 110 per cent. The September report this year noted that the pace of debt accumulation is outstripping the rate of growth in families’ disposable income.
The prospect of rising interest rates has led to questions about whether Canadians will be able to service their debt loads. And there are worrisome red flags in Manulife’s report, which used an online survey of 2,372 homeowners across the country with household incomes of at least $50,000.
‘They feel they’re prepared, but when life happens, they’re not prepared’
For one thing, many people seem puzzlingly confident in their ability to handle unexpected expenses, with nearly three-quarters of respondents saying they could handle it if they had to replace their furnace or were hit with a major car repair. Yet half of those surveyed said they are already struggling to maintain a cushion of as much as $1,000 in bank accounts. And then there’s the 38 per cent who, at least once, had to borrow from family, credit cards or lenders, or sell investments to cover their bills.
“It does suggest a contradiction,” Lunny said. “They feel they’re prepared, but when life happens, they’re not prepared.”
That said, there are those who manage to walk that fine line with skill: One-third of people who came up short used lower-interest credit lines, rather than riskier forms of debt, and 23 per cent accessed “rainy day” savings set aside for emergencies. What’s more, the survey doesn’t say how many of those who used higher-interest credit cards paid them off in time to avoid any interest charges.
Of course, even those lower-interest credit lines will get more expensive when rates finally rise. Combined with higher mortgage costs, that could really ratchet up pressure on overleveraged households.
“A rate increase of one per cent could be enough to make things difficult, said Hannah, of the Credit Counselling Society. “And certainly a two per cent rate increase would present some challenges for a lot of homeowners.”
But Avery Shenfeld, chief economist at CIBC World Markets, said the key figure to watch is employment, rather than consumer debt levels.
Mortgages have largely been issued to those who can carry them as long as they keep their jobs, and mortgage arrears are at a historic lows, he said.
What’s more, the Bank of Canada “knows about the debt burdens, and will err on the side of raising rates slowly when that time comes, in order to avoid a larger shock,” Shenfeld said.
“Rates will only move up materially when the economy and the job market is stronger than it is now.”