The Bank of Canada has kept interest rates at near record lows for several years. From central bank chief Mark Carney to today’s Stephen Poloz, Canada has experienced some of the lowest rates on record. This has kept borrowing costs at all-time lows (for now), but also a plethora of unintended consequences.
One of these unintended consequences is the skyrocketing household debt from coast to coast.
According to a new report from Equifax, Canadian consumers had $1.568 trillion worth of consumer debt in the second quarter of this year. This is equal to $21,164 of debt per Canadian, which has gone up two percent in the past year.
Here are the debt loads per province:
Alberta: $27,313
British Columbia: $23,011
Manitoba: $17,573
New Brunswick: $21,449
Newfoundland & Labrador: $22,055
Nova Scotia: $21,063
Ontario: $20,793
Prince Edward Island: $20,853
Quebec: $17,758
Saskatchewan: $23,347
Just what are Canadians buying? Here is an excerpt from the Globe and Mail:
“Since the start of the year, consumers have been drawing down their savings to buy houses, cars, furniture and clothing. Credit-card spending rose by 8 per cent this year, with spending on restaurants and fast food up more than 12 per cent, according to a study by payment processor Moneris Solutions Corp. Auto loans rose nearly 4 per cent in the second quarter on the back of record vehicle sales, credit rating agency Equifax found. But much of the strength has been driven by the resilient housing market, which has convinced buyers and homeowners to pour money into their homes.
“Home improvement spending soared nearly 10 per cent in the second quarter of the year compared with the same time last year, led by sales of glass, paint, wallpaper and flooring, Moneris found. Furniture sales are up more than 17 per cent. Half of all consumer spending now comes from Ontario and B.C., two markets that have led the way for home prices and where Toronto-Dominion Bank economic analyst Admir Kolaj notes retail sales have also had the best start to the year in the past decade.”
Bank of Montreal chief economist Douglas Porter told the newspaper that consumers will ultimately choose instant gratification if they are employed, receive modest wage increases and live in a low-rate environment.
The problem, however, is that all of this spending by households from British Columbia to PEI isn’t matching the incomes. The household debt to income ratio is now at an all-time high of 165 percent. Today, Canadians spend 14 percent of their after-tax income on debt servicing payments, up from 11 percent in 1990 (when rates were at 14 percent).
Ostensibly, it seems seniors are bearing the brunt of this potential debt crisis. Seniors increased their debt loads by 4.9 percent, and their delinquency rate rose by 2.4 percent in the second quarter.
These are huge numbers considering that the Great White North has been a “technical recession” all year long. Demand for credit is strong. Perhaps Canadians believe to become prosperous is to spend their way out of their perpetual indebtedness.
This is what Liberal leader Justin Trudeau advocates in the current campaign cycle. So why wouldn’t consumers follow his rhetoric?
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