Advisors are stressing over client debt – which in turn is creating a vicious circle of stress upon stress.
A recent BMO report suggests that 89 per cent of consumers would either be “stressed or very stressed” should interest rates increase by a mere two percentage points from the current historical lows. But the current low-rate environment is also taking its toll.
“I was asked recently about the effects of a 2% interest rate increase on the Canadian public. We have been told for years that current rates are unsustainable and they will need to increase at some point,” WP
has learned from Pangea Personal Financial Planning regional director Michael Sadeh. “Unfortunately what these rates are doing is masking a larger problem which I believe to be a much weaker Canadian economy than the media is letting on.”
What that means for the future is anyone’s guess given interest rates, at least in Canada, won’t be going up for some time as economists raise the spectre of ongoing recession.
“It was reported that we are still one months away from the six months of negative growth that is required to qualify us as officially being in a recession,” added Sadeh, “and the unemployment numbers are better than expected with positive gains in full time work, but these quantifiers don’t tell the full story.”
While clients are worried, so too are advisors, perhaps more.
“The truth is, it’s hard to find Canadian families that feel they have job security, regardless of the sector or region they live in,” stated Sadeh. “Unemployment is one part of the story, but underemployment is running rampant and people have transitioned from keeping part-time jobs and short term contracts to accepting full-time positions well below their previous pay grade.”
Stories of plant closures are not being offset by expansion in similar industries or competing manufacturers, he added, and the losses have been piling up for years as the real estate market was artificially inflating consumer confidence.
So, why are so many Canadians stressed about debt? Two words: real estate.
“Last fall consumers had short term relief in gas prices due to the collapse in crude but the lower Canadian dollar has all but eliminated those savings. Not to mention the lost tax revenue and decline in our energy sector,” stated Sadeh. “The last bastion for growth, artificial or otherwise in the economy, was real estate. Would the Bank of Canada risk damaging the otherwise weak economy further? It will not take that chance, because behind closed doors it knows all these examples of a frail economy are far too real and when the dominos start to fall, as there is no telling where they will stop.”