Canada's brewing debt storm - - Globe and Mail

For every $1 of disposable income, Canadians owe a record $1.47. How did it come to this?

By Paul Waldie and Steve Ladurantaye

From Saturday's Globe and Mail

Canadian borrowers are fast approaching a day of reckoning.

Lured by cheap money to buy up, buy in, expand and make over, families have pushed credit levels to a record high.

Now, mortgage rates are beginning to creep up and the Bank of Canada is poised to retreat from the record-low interest rates it adopted to fight the recession and spur recovery.

The end of the free-money era has left consumers more vulnerable than ever, and those who threw caution to the wind could soon face costs they can't handle.

Household debt has surged three time faster than income in recent years and now stands at a record high of more than $1-trillion. Put another way, Canadians owe about $1.47 for every dollar of disposable income. Even more remarkably, they took on more debt during the slump - a first for a recession - because borrowing was so cheap.

With debt levels this high, even a small hike in interest rates will be ugly for those whose incomes aren't rising fast enough to meet their day-to-day expenses.Their woes could have a snowball effect: As debt-strapped consumers pull back, their credit woes spill over into the broader economy and risk putting a damper on the recovery.

For some, the trouble has already begun. John Silver, who runs Community Financial Counselling Services in Winnipeg, has seen his caseload increase 20 per cent from last year. "We re seeing more people coming in with more stress with regard to their debt," he said.

Much of the recent rise in debt in Canada has been due to low interest rates, generally easier credit terms and fierce competition among lenders. Even when the recession hit in late 2008, Canadians remained far more confident than Americans in part because of a better housing market and stronger financial institutions. Consumer confidence in Canada is only about 20 per cent below where it was in 2007 whereas it's 60 per cent lower in the U.S.

The higher confidence level and stronger banks meant Canadians were far more eager to borrow during the recession than Americans, said Benjamin Tal, senior economist at CIBC World Markets."I can offer you a very low mortgage in the United States and you won't take it," he said. "In Canada you jump on it, because confidence is high."

Now though, "what I'm seeing is a consumer that is more sensitive to higher interest rates," he added.

Most of the increased debt, roughly 70 per cent, has been in mortgages, reflecting the still hot housing market in much of the country. That has left many households struggling to meet monthly payments on hefty mortgages and more susceptible to rising rates. Families in Vancouver, for example, spend about 68 per cent of their disposable income on the cost of maintaining their house, compared to less than 40 per cent 10 years ago.

"There's been a real frenzy just to get in [to a house] at all cost, because if you don't get in you may never get in," said Scott Hanah chief executive of the Credit Counselling Society, a non-profit group based in Vancouver that helps people sort out their debts.His organization is fielding about 4,000 calls a month and has seen a 10-per-cent increase this year in the number of people seeking help."Last year we saw an increase in activity of over 50 per cent. So to have a further 10 per cent increase on top of that is significant," he added.

There are many people in the same position as James Laidlaw and his young family, who borrowed to build onto their Toronto home, adding construction costs on to a mortgage to help finance $250,000 in renovations and an expansion of 600 square feet.

Even a jump in mortgage rates of just half a percentage point will mean an extra $1,700 a year for Mr. Laidlaw, his wife and two children."Every dollar counts and I'm already thinking about the other things that may suffer," he said. "Maybe we'll have to lose the vacation, or scale back Christmas.

"Canadians used to be big savers and cautious borrowers. In 1982, Canadians socked away 20 per cent of their disposable income and per capita debt stood at about $5,500, according to Statistics Canada. By contrast, Americans were saving just 7.5 per cent of their disposable income at that time and borrowed $6,500 per capita.

Savings and borrowing soon went in opposite directions in both countries and by 2002 debt levels surpassed disposable income for the first time. In 2005, the savings rate in Canada fell to 1.2 per cent, about the same as in the U.S. Meanwhile, per capital borrowing jumped to $28,390 in Canada and $48,700 in the U.S.Consumers are feeling the pinch. A survey last year by the Certified General Accountants Association of Canada showed 21 per cent of respondents could barely meet the interest payments on their loans. The group is about to release a similar survey this year and, said the group's chief executive Anthony Ariganello, the level of those struggling to cope has climbed to about 23 per cent.

"We may be back into a recession [next year] because, remember, part of what has helped us get out of this recession was spending and consumer spending at that, and if people don't have money to spend we could be rapidly back in to where we started," he added.And while consumer spending and confidence have increased recently, both may be short lived, said CIBC's Mr. Tal.

"There is a gap between confidence and ability," he said. "It's a gap between what's in your head and what's in your pocket. And this gap is, of course, a matter of concern because consumer confidence is high due to the fact that interest rates have been extremely low and people are able to finance those mortgages and those loans.

"In a recent report, Mr. Tal concluded that "Canadian consumer fundamentals are weaker than they have been in almost 15 years."That's something that concerns officials at the Bank of Canada. If consumers run into trouble with their mortgage payments, that in turn can lead to "wider problems with other consumer loans, such as credit card debt," David Wolf, a Bank of Canada economist, said in a speech in January. "Consumers may also have to curtail other spending to cope with their debt burdens, creating adverse spillovers to the real economy.

"Michael Hammond has already scaled back his plans. The Ottawa resident has a pre-approved mortgage of $220,000 and has been looking for a house. He nearly bought a $214,000 townhouse last week, but backed off because he's still considering the effect of eventual higher rates."I am mulling over mortgage scenarios in my head like crazy right now," he says. "It's a scary time to be looking for a house. I'm looking at three cheaper homes today because I am so worried about overextending myself and getting caught five years from now.

"Neil Bigelow and his partner Tina Boudreau are also running over financial calculations as they prepare to buy their first home. The couple has been planning to buy a piece of land in Halifax and build their own home. But the prospect of rising rates has them worried about how much to borrow.

"Right now I could probably get $200,000 mortgage," said Mr. Bigelow. "But what's going to happen down the road because interest rates are not going to stay where they are at."

By the numbers

68%: Average amount of disposable income households in Vancouver spend on the cost of a home

44%: Average in Toronto

35%: Average in Calgary

36%: Average in Montreal

30%: Average in Ottawa

21%: Percentage of Canadians who say they can't manage their debt load

147%: Debt-to-income ratio in Canada, a record high

157%: Debt-to-income ratio in the United States

70%: Percentage of debt held in mortgages in Canada

Certified General Accountants Association of Canada, CIBC Economics, National Bank economics and Statistics Canada

BurnRate.ca - Do you spend too much?

From CBC News.

More than half of Canadians under 50 spend their disposable incomes without thinking about their financial futures, suggests a study released Thursday. I encourage you to go to http://www.mackenziefinancial.com/en/burnrate/index.html to check out the resources that Mackenzie has setup. In particular the videos are quite funny and may hit a little close to home for some.

The Burn Rater Test

1. Have you gone shopping and/or bought things to make yourself feel better?
2. Have you spent money in your account near the end of a pay period, because you knew you were about to get paid again?
3. Have you hidden purchases from family or friends, or told someone you paid less for something than you actually did?
4. Have you bought things you wanted, without considering the longer-term impact of the cost on your personal finances?
5. Have you entertained family or friends at home or at a restaurant more than you could afford?
6. Have you used your credit card to buy something when you didn't have enough money in your bank account to pay for it?
7. Have you avoided looking at your bank account or balance because you were concerned about how much money you've spent?
8. Have you regularly bought things on the spur of the moment?
9. Have you gone shopping (not including grocery shopping) two or more times a week?
10. Have you focused on spending today ahead of creating a budget or financial plan for the future?
    

The Burn Rater spending test, commissioned by Mackenzie Investments, found 24 per cent of respondents under age 50 are overspenders and 32 per cent show overspending tendencies.The term burn rate refers to how quickly disposable income is spent. Questions included: "Have you gone shopping and/or bought things to make yourself feel better?" and "Have you spent money in your account near the end of a pay period, because you knew you were about to get paid again?"Dr. Sunghwan Yi, a professor of marketing and consumer studies at the University of Guelph who helped develop the test, said people who overspend have a hard time making ends meet and trouble saving for the future.

Researchers asked 1,169 adult Canadians to complete an online survey of 10 questions on their spending habits that could be answered yes or no. The polling was conducted by Decima Research in December.

A respondent who answered yes to up to three of the questions was considered a controlled spender, while anyone who answered yes to four to six of the questions showed overspending tendencies. Anyone answering yes to seven or more questions was categorized as an overspender.

The study found Canadians are busy shoppers, with 45 per cent hitting the stores, not including for groceries, twice or more weekly. More than half of Canadians admitted to being impulse buyers, while 37 per cent of respondents under 50 and 22 per cent of those over 50 said they have hidden purchases or told someone they paid less for an item than they actually did.
Many Canadians said they rely on retail therapy for a pick-me-up, with 60 per cent of those under 50 and 47 per cent over 50 making purchases to make themselves feel better.
And when they're spending, almost half of Canadians use their credit cards to buy something when they don't have enough money in their bank accounts to pay for it.

Young, middle-aged not planning for future

Thirty-seven per cent of Canadians said they are not planning financially for the future. Forty per cent under 50, and 21 per cent over 50, said they focus on spending today rather than making a budget.

Sunghwan said he was surprised by the findings, especially "the great divide between under 50 versus over 50 people."

On average, Canadians under 50 answered yes to 4.35 of the test questions, compared to 2.88 for those 50 and above. Only five per cent of respondents over 50 were considered overspenders.

The findings suggest younger and middle-aged people "tend to basically spend money without thinking about their financial future," Sunghwan told CBCNews.ca, adding they "don't seem to appreciate the fact that the retirement age is quickly approaching and this realization often comes as they reach the age of 50, but it's way too late.

"We need to really encourage younger Canadians to start saving money and to develop a healthy habit of saving and investing as early as possible."

Curb your spending

Sunghwan said the study showed a concerning pattern of young and middle-aged people focused "on now rather than the future."

He said the most important changes people can make to improve their spending habits and start saving for the future are creating budgets and using cash instead of credit, because "people tend to feel greater pain when they hand over cash than when they are using a credit card."

He also recommended that Canadians arrange for a set amount of pay be automatically transferred to their savings and investing accounts.

"This way you save first and use the remaining money as necessary, instead of the other way around," he said. And for the impulse shoppers, he said, "Try to walk away for at least 24 hours if you're about to buy something on impulse… during this 24 hours, you are likely to realize that the things you are about to purchase on impulse are not really that important."

Consumption

I suggest everyone visit http://www.storyofstuff.com/ and watch. This is the mess we have gotten ourselves in as a society and we need to come up with solutions for a more sustainable way of life for our financial well being, our health, and for our environment.

Credit Cards in Canada

Credit card use in Canada is a prolific and a very profitable business for financial institutions. At the end of 2006 there were over 60 Million Visas and MasterCards in the pockets of 30 million Canadians. There were over 26 Million active Visa and MasterCard accounts. So, irrespective of American Express, Diner's Club, and department store cards, every man, woman, and child in Canada has 2 cards each.

What do we do with all of this available credit? We spend, a lot. Visa and MasterCard transacted over $214 Billion dollars worth of business in Canada in 2006 and were able to charge over $29 Billion dollars of interest and fees on the 26 Million active accounts.

Over the past 10 years, the number of active credit card accounts has doubled, credit card transaction volume has tripled and the profit from these transactions has quadrupled for the card issuers. Credit cards have been a high growth business to be sure.

Canadian are diligent about paying their credit card bills too. The delinquency rate on credit card balances is low at less than 1% and has remained quite low for at least 15 years. A seemingly low risk business with very large profit margins. I wonder what the future has in store.



How do you feel about the large profits being generated by the credit card companies? How do you use your credit cards? Merchant fees can sometimes be high and I often wonder how much that affects the price of the goods we buy.

My wife and I use our Visa card for nearly every purchase we make because we get cash back and don't have to carry cash or pay any banking fees for using a debit card. We also pay off our balance every month and haven't paid a cent in interest or fees since having these cards. I know that isn't necessarily typical among the general population but is likely fairly representative of the readership of this blog!

What I Like About Scrooge

In praise of misers.

By Steven E. Landsburg

Here's what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him.

Scrooge has been called ungenerous. I say that's a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?

Oh, it might be slightly more complicated than that. Maybe when Scrooge demands less coal for his fire, less coal ends up being mined. But that's fine, too. Instead of digging coal for Scrooge, some would-be miner is now free to perform some other service for himself or someone else.

Dickens tells us that the Lord Mayor, in the stronghold of the mighty Mansion House, gave orders to his 50 cooks and butlers to keep Christmas as a Lord Mayor's household should—presumably for a houseful of guests who lavishly praised his generosity. The bricks, mortar, and labor that built the Mansion House might otherwise have built housing for hundreds; Scrooge, by living in three sparse rooms, deprived no man of a home. By employing no cooks or butlers, he ensured that cooks and butlers were available to some other household where guests reveled in ignorance of their debt to Ebenezer Scrooge.

In this whole world, there is nobody more generous than the miser—the man who could deplete the world's resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar's worth of goods and didn't consume them.

Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you'll bid down the interest rate by just enough so someone somewhere can afford an extra dollar's worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you'll drive down prices by just enough so someone somewhere can have an extra dollar's worth of coffee with his dinner. Scrooge, no doubt a canny investor, lent his money at interest. His less conventional namesake Scrooge McDuck filled a vault with dollar bills to roll around in. No matter. Ebenezer Scrooge lowered interest rates. Scrooge McDuck lowered prices. Each Scrooge enriched his neighbors as much as any Lord Mayor who invited the town in for a Christmas meal.

Saving is philanthropy, and—because this is both the Christmas season and the season of tax reform—it's worth mentioning that the tax system should recognize as much. If there's a tax deduction for charitable giving, there should be a tax deduction for saving. What you earn and don't spend is your contribution to the world, and it's equally a contribution whether you give it away or squirrel it away.

Of course, there's always the threat that some meddling ghosts will come along and convince you to deplete your savings, at which point it makes sense (insofar as the taxation of income ever makes sense) to start taxing you. Which is exactly what individual retirement accounts are all about: They shield your earnings from taxation for as long as you save (that is, for as long as you let others enjoy the fruits of your labor), but no longer.

Great artists are sometimes unaware of the deepest meanings in their own creations. Though Dickens might not have recognized it, the primary moral of A Christmas Carol is that there should be no limit on IRA contributions. This is quite independent of all the other reasons why the tax system should encourage saving (e.g., the salutary effects on economic growth).

If Christmas is the season of selflessness, then surely one of the great symbols of Christmas should be Ebenezer Scrooge—the old Scrooge, not the reformed one. It's taxes, not misers, that need reforming.

Another Scrooge Analysis.