Consumer debt is bad – but maybe not as dire as we thought
Consumer debt levels in Canada are higher than ever, a fact that has caused a lot of discussion, stress and panic. However Avery Shenfeld, the chief economists at CIBC World Markets puts forward a case for worrying less about our debt.
The avaergae debt to income ratio for Canada was 164% at the end of 2013. This is comparatively high, and is often used as the main indicator of indebtedness.
However, Mr., Shenfeld says that though the levels are high most Canadians can afford the debt they carry.
Delinquency rates on credit are low and falling, as are the number of mortgages in default or arrears. The debt-service ratio, which measures the percentage of our disposable income that goes towards paying interest on debt is also at a low of 7.1%
Much of this affordability can be attributed to the current low interest rates provided by the Bank of Canada, and there are worries about what will happen with our high levels of debt when the rates increase to normal, pre-crisis levels.
However, Bank of Canada Governor Stephen Poloz has talked recently about how the country’s aging population could result in slower economic growth and lower interest rates than we saw pre-crisis. The Bank of Canada is aware of the current economic climate and the high debt rates of Canadians. Mr. Shenfeld believes they will be cautious with interest rate increases and are unlikely to make decisions that could harm the economy.
It is still important to realise that high debt levels are only affordable as long as you are making money. High levels of debt make you vulnerable if your financial situation changes; reduced income is the number one reason cited for financial problems, and the job market is still not particularly stable, with a loss of full time positions and an increase in part time ones.
It is also important to realise that paying off debt, even when affordable, takes resources away from savings. Fewer and fewer people are adequately prepared for retirement, and higher levels of debt can heavily impact your ability to be so.