Making Your CADs Stretch Further into the New Year

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According to reports, Canadian household debt levels are rapidly increasing, and that is fuelling concerns in Canada about how everyday folks can repay their debt. Several important changes are taking place around the world, notably increasing interest rates in the UK, the US, and possibly in Europe. This does not bode well for Canadians who face mounting levels of debt.
A recent report by FOX Business concluded that Q3 2017 household debt increased to a record high while incomes were declining. Stats show that the jump from Q2 2017 household credit debt/disposable income jumped from 170.1% to 171.1% in Q3 2017. Such trends are worrying, given that Canadian households owe approximately $1.71 for every $1 of income after tax. If the Bank of Canada pursues a policy of monetary tightening (i.e. interest rate hikes), this will only exacerbate the current situation further.
On 6 December 2017, the Bank of Canada retained its overnight rate of 1%, as analysts anticipated. Several important points can be taken from the recent decision by the Bank of Canada, including the following:

  • Rising inflation is expected, fuelled in part by higher gasoline prices
  • Employment growth will continue as wages have improved, but housing growth mains moderate
  • Higher interest rates will be required over time and the Governing Council will act judiciously to assess the state of the Canadian economy before hiking rates

Bank of Canada May Adopt a Go-Slow Approach Owing to High Debt Burdens

For the average Canadian household, these indicators are particularly important. Given that Q2 2017 estimates forecast a debt/income ratio of 167.8%, the current reality is a lot more concerning. This is one of the reasons why Canadians are paying close attention to their lines of credit. People are doing their homework when it comes to personal loans, business loans, credit cards and other financing options. After the Canadian Tax Agency reviewed the data, they confirmed that the 170% debt threshold was breached. According to Statistics Canada, there was a 1.4% increase in total household credit to C$2.11 trillion.
Ironically, it is thanks to ultralow interest rates that debt levels have risen so sharply. This bodes well in a low interest-rate environment, but now that the Bank of Canada is on track to raising interest rates, it is more concerning. The situation was further hampered when the RBC (Royal Bank of Canada) indicated that debt was also higher when assets were considered relative to net worth. This simply means that less money (personal disposable income) is available to the average Canadian household. Similar sentiment was expressed by the Business Council of Canada. To protect Canadians from the ravages of higher interest-related repayments on outstanding debt, the BOC will be carefully eyeing economic activity before it raises rates.

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Making the loonie stretch further

One of the biggest bugbears in the equation is credit card debt. Many Canadians are now scrutinizing the types of credit cards that they apply for, to enjoy maximum traction from every dollar spent. Many snowbirds who travel to the US to places like Florida and California in the wintertime have been benefiting from Canadian credit cards with no transactions fees. This has proven to be a more cost-effective option than exchanging CAD for USD at Forex bureaus, or banks. Many of these credit card providers now offer $0 annual fees, and low or negligible foreign transaction fees. The usual cash back offers are still provided, which act as an enticement to Canadians looking to save money and curtail the runaway debt levels that are plaguing the average household.

Ipsos Reports are In

According to Ipsos reports, typical Canadian households owe an estimated $8,500 in consumer debt, and that excludes their mortgage balances. The mid-December poll revealed that 12% of respondents had consumer debt of $25,000 +, while those with $10,000 – $24,999 numbered 14% of respondents. The picture is not entirely bleak, with some 46% of Canadians polled indicating that they had zero debt. Overall, the average consumer debt is $15,473, most of which is held by generation X. People older than 55 had debt of just $9,000 on average, while millennials had debt of just $5,600 on average. Regardless of the demographics, there is an underlying need for better monetary management and informed credit utilization.

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