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by Janet Doyle
It is July 31, 2019 and today the United States Federal Reserve dropped the US interest rate by .25%. To quote financial guru Gerald Celente: “Across the globe, central banks are pushing interest rates lower and governments are going deeper in debt as they shovel in more artificial stimulus to pump up equity markets and stave off the pending economic meltdown.” This is the first interest rate reduction in several years notwithstanding several increases by the Fed in interest rates recently in an effort to prepare its war chest for the next recession which appears imminent.
Many economists have strong negative feelings and opinions towards the global financial conundrum. The ballooning credit/debt economy in the face of ignored economic fundamentals, has spawned bubbles in the stock markets, housing markets and bond markets. Particularly concerning is how consumer behaviour has been altered for the worse with significant debt being the norm but also making life unaffordable for much of our population. Because Canada is so tightly tied to US fiscal policy, we have been dragged along into the fantasy land of unsupported fiat money with the prospect of deflation, hyperinflation and recession lurking in the murky waters ahead.
Is the average Canadian to blame for this? We think not as we have been led by example by Canadian politicians who have may have been the forbearers of Modern Monetary Theory now espoused by politicians on the left south of our borders. Ontario residents, owners of their provincial debt burden, now bear the honour of being the highest per capita non-sovereign debtors in the world while their federal government continues to add to the Canadian federal debt at the rate of over $54 million per day.
By now, you’ve probably seen the headlines; Canadians are in debt at record levels across Canada. Except that other than the headlines, it appears that we don’t really have a problem. The housing market continues to boom, increasing the equity on homeowner’s investments, and social media shows us that everyone has a more expensive car, fancier handbag, and can afford a better vacation.
In reality, most people are keeping up appearances. 31 per cent of Canadians say they don’t make enough to cover their bills and debt payments. Why are Canadians in so much debt? How did this happen? And more importantly, why are we pretending like it doesn’t exist? Several economic and social factors have contributed to a financial boom that is resting on a looming debt load. Fiscal policy is being mismanaged by government as Canadian society undergoes significant changes affecting our future, resulting in a bill we can’t afford. How did this happen?
Salary Stagnation
As inflation, interest rates, the cost of living, and housing prices continue to rise, Ontario salaries are not matching the same pace of growth. Global News reported that the average wage in Canada hasn’t changed since the 1970’s; when adjusted for inflation, both the minimum wage and the average hourly wage have remained relatively unchanged since the mid 1970’s. In Ontario, low-income earners, single parent families, and working age individuals are faring the worst. The Financial Accountability Office of Ontario stated, “Families with a higher incidence of low income, particularly working-age people living alone and single-parent families, experienced absolute declines in their real after-tax income.” While expenses have increased, income hasn’t, and income has actually dropped for families that typically face the additional hardship of managing a household on one income.
For those looking to increase their income by growing their career, student loans are an obvious option to finance their education, but it comes at a cost. In the United States, the National Center for Education Statistics calculated the tuition for four-year public universities from 1973-1976 and 2003-2006, and the difference is staggering. The boomer generation needed only 306 hours of minimum wage work needed to pay for four years of public college; millennials required 4,459.
Student Loans
Despite the high cost of tuition, there continues to be a demand for an educated workforce. 70% of new jobs in Canada require post-secondary education, and as the average cost of tuition continues to rise, the combination is creating a financial hurdle for those entering the workforce. Although salaries have stayed consistent, the number of post-secondary graduates has increased to match the demand for higher skilled workers. In addition, most students lack basic financial literacy and budgeting knowledge while becoming of age to access credit, learning to managing the cost of living on their own while going into debt to finance their future. Most Canadian graduates carry some form of student debt, with the average university graduate carrying $26,000 in student loans by the time they complete their degree, as they enter a workforce in entry level positions – and salaries.
Interest Rates
In 2008, facing a nationwide recession, the Bank of Canada proceeded to lower the prime interest rate from 4.25% to .25%, providing Canadians with greater access to credit with the goal of stimulating the economy. With access to more credit, Canadians began investing in the housing market, driving prices higher as many consumers took out the highest value mortgage they were qualified for. Low interest rates encouraged Canadians to add to their debt; and after years of enjoying access to greater credit at low interest rates, Canada’s housing market has become famous for a “housing bubble”. The inflated and unaffordable housing markets across the country is resting on the inflated debt of Canadian consumers.
Since 2017, the Bank of Canada has raised interest rates 5 times in an attempt to curb consumer debt, meaning that credit for people in Canada has begun to cost more every month. In addition to adding the burden of mortgages, credit cards, loans, lines of credit, and other variable rate instruments, debts have become more expensive for Canadians to manage.
Housing Market Madness
While everyone has heard about the cost of the housing market, the numbers in comparison to previous generations are shocking. The average Ontario millennial takes 15 years to save a 20% down payment for a home, whereas it took their parents only 5 years. It’s no surprise that a survey by the CIBC showed that 65% of millennials were renting or living at home, and 58% of millennial home owners were concerned with rising interest rates.
The housing market in Canada is no longer seen as a place to live, but as an investment. Consumers are spending money on housing investments and renovations as they continue to access credit, using their house as collateral at an inflated value. In order to afford to buy a home in Ontario, earnings may need to jump to $109,000 annually or average home prices need to drop by $307,000. In Toronto, it’s even more – salaries would need to triple, or average housing prices in Toronto would need to fall by $523,000.
After maxing out their credit on mortgages, withdrawing from savings for the down payment and paying the 4-5% closing fees, many homeowners are unprepared for the associated ongoing costs that come with their investment. Property taxes, utilities, insurance, condo fees, repairs and normal maintenance expenses can add up to a significant additional cost in addition to the mortgage payment. With all these additional fees adding to the responsibility of home ownership, many homeowners regret their purchase; a poll by CBC in 2017 reflects that 60% of people between 18-37 express buyer’s remorse over the financial and social costs of home ownership.
Social Media FOMO (Fear Of Missing Out)
Social media has been cited as a source of increasing pressure for consumers and damaging to their psyche, driving them to spend money they don’t have to keep up with what they see online. 57% of millennials admitted to spending money they hadn’t planned to because of what they saw on social media feeds, and 61% feel inadequate about their own life and what they have because of social media, according to the Allianz Life Insurance Company of North America. With the average person spending 135 minutes on social media a day, that means we’re consuming a lot of content that is fuelling our desire for an unattainable lifestyle; travelling, luxury brands, boats, and cars as well as shopping for the essentials required to compete with the filter apps on our smartphones.
What social media doesn’t show is that the balance sheet for many Canadians is in the red. When considering all the above-mentioned factors, it’s no surprise that consumers in Canada continue to break records as debt levels continue to increase. At the same time, banks and fintech companies are exploring new ways to make money off consumer credit; using customer data to entice consumers into more debt under the premise of improving their situation, either through improved credit or a better lifestyle that can be paid off later.
In addition to these economic and social factors, many people face financial emergencies throughout their life; whether job loss, health complications, or surprise repairs, it’s inevitable that situations in life come up that require emergency funds. Canada’s younger generations are more at risk, with less time to build up savings and equity, rising costs are driving them further into debt. Canadian household debt reached a record high of 178.5 per cent at the end of 2018, and Manulife Bank reports that close to 40% of Canadians between 20-69 years old are in debt because they are living beyond their means.
With 1 in 3 Canadians spending more than they make, Canadians are starting to look at alternative ways to deal with their debt, but embarrassment and shame keeps many from seeking help. They are doing what they were told, pursuing education to get ahead in their career and buying houses as investments, and yet the results are an overwhelming amount of debt that could take a lifetime to pay off.