Gas Goes Down, Debt Goes Up
Apparently you can’t win. Gas prices go down, saving consumers money, but then the commodity-based Canadian economy is hurt by the shortfall in oil revenues, shown in the dropping loonie. You’ll have more money to spend on you next trip to Buffalo but it won’t go as far as before.
While less costly fill-ups are leaving us with more cash, it’s not staying in our pockets as Canadians take on unprecedented levels of debt.
According to a Financial Post article, the loss of oil revenues will hurt the housing market, which already saddled with “near-record levels of household leverage. . . . Canada’s ratio of household debt to disposable income rose to a record 162.6% between July and September, according to data released last month. Benchmark interest rates of 1% have fanned a house-buying frenzy that sent 2014 sales up 6.7% in Toronto and 16% in Vancouver.”
Then a Globe and Mail article points out: “Oil prices may be crashing and sparking fears of an economic downturn, but Canadian households continue to have few qualms about piling on debt. . . . Household credit grew by an annualized rate of 4.5% in November, a two-year high and the second month of strong gains, to top $1.8-trillion.”
Residential mortgage debt had the biggest jump, leaping 5.2% in November from the same month a year before. Other forms of credit, including credit cards, lines of credit and loans, grew by 3%.
Canadians have been able to service their high debt levels because of relatively low interest rates. But if the country’s unstable economic conditions lead to a spike in interest rates, then the load might become unbearable for many, leading to bankruptcies and other credit problems.
If you have any doubts about your own situation call Richard Killen & Associates and we’ll set up a free consultation to assess everything and review all your options. It is usually a good idea to get ahead of any potential problems that may lie just over the horizon.
Will Bankruptcies Increase as Economy Improves?
As the outlook gets rosier for the Canadian economy, those in deep dept may pay the price with bankruptcy.
With the U.S. economy expected to undergo a widespread recovery next year, Canada will likely fall suit, with rising interest rates as well. Normally this would be good news. However, Canadians are going into the biggest shopping season of the year staggering under the load of a record $1.51 trillion in debt.
Our debt levels significantly outstrip those of American consumers. Excluding mortgages, our average debt has increased 2.7 per cent to $20,891, a recent article in the Globe and Mail points out.
On the tipping point
Lulled by five years of rock-bottom interest rates, we have taken on mountains of debt. While an improvement in the economy would normally be accompanied by a fall in the number of bankruptcies, our financial situations are so precarious that a small rise in interest rates could have disastrous consequences.
“We might see bankruptcies rising alongside interest rates,” affirms CIBC economist Benjamin Tal in a Huffington Post article.
With a frenzied beginning to the holiday buying season – seen in the Canadian embrace of America’s Black Friday madness – all indications are that household debt will go even higher, as December’s credit card bills become due in January.
Homes and cars
Many Canadians have been lured into the housing market with low interest rates, even though house prices have soared in key markets. In Vancouver, for example, the average price of a single-family detached home is now close to, gulp!, $1 million.
Overall there has been a marked increase in mortgage debt that puts many at risk if we see an increase in interest rates.
Auto loans and installment loans have been responsible most of the debt increases, up 6.8 per cent and 5.8 per cent respectively, Equifax Canada points out. Installment loans are loans with fixed monthly payments, which can include loans us for cars, furniture or home renovations.
Not all bad news
While our debt levels have come up, delinquencies and bankruptcies have actually gone down in recent quarters. Perhaps people are more determined to live within their means, or they have become aware of how precarious their situation is.
If after the turkey leftovers are gone, and the bill statement begin to fill your mailbox and email inbox, you feel that your debt situation is getting out of hand, call us at Richard Killen & Associates.
As one of Toronto’s friendliest and most respected Licensed Insolvency Trustees, we’ll sit down with you for a free assessment. We will lay out your options, whether it is taking an amalgamation loan, negotiating with creditors, offering a consumer proposal or going into bankruptcy and starting again with a clean slate.
Let it be a very Happy New Year for everyone.