Rate hikes may be the last thing Canada needs as other trends weigh on households' ability to pay their debts
A new online and phone-based poll of Canadians commissioned by Bloomberg has concluded that Canadian households have not yet reached their breaking point as far as interest rates are concerned. But a right-wing policy think tank maintains that the government must hold back on moves that could add to people’s debt burden.
“The long-term buildup of urban house prices had already made people financially vulnerable and consumer insolvencies in Canada increased by 9.2 per cent annually through October 2018,” said Fergus Hodgson, research associate with the Frontier Centre for Public Policy, in a new commentary.
Noting that consumer debt has crossed the $1.834-trillion mark, Hodgson cited warnings that the number of households struggling to pay their debts — particularly from credit cards and floating-rate mortgages — will rise further this year and possibly beyond 2020.
Millennials appear to be the hardest-hit, he added, with Ipsos data noting that 62% are worried about their ability to handle their obligations, and 46% are “moving closer towards bankruptcy.” That aligns with the Bloomberg-commissioned poll, wherein 51% of 18- to 34-year-old respondents said they were cutting back on spending because of higher borrowing costs.
So why did the broad majority of respondents to the poll say that they weren’t feeling the pinch? That might be partly due to a lag effect between the onset of a rate-hiking regime and the impact on consumers, which could be as long as two years. Like people who do not realize they’re inebriated until it’s too late, Canadians who have binged on debt may not realize how financially vulnerable they are to unexpected disasters or job losses.
“However, an infatuation with interest rates and personal habits distracts from contributing trends in productivity, purchasing power and discretionary income,” Hodgson said. He referred to the burden of taxes, which some estimates say average $50,000 and represent the most expensive item in household budgets. Tax growth, he went on to claim, has far outpaced inflation and productivity growth.
The housing market has started to cool off, and recorded inflation has gone down in recent months. But he noted that housing-price indexes in expanding metropolitan areas like Toronto are still elevated at 2017 levels, and the average cost of living is still relatively steep, with spending on goods and services rising by 2.5% in 2017 to reach $63,723 for the average household. “Toronto, Vancouver, Montreal, Calgary and Ottawa are among the world’s 200 most expensive cities,” he said.
And while the official unemployment rate has hit a four-decade low, he argued that Canadian wage growth has not been enough to match rising costs. Citing data from Statistics Canada, Hodgson said that Canadians’ hourly pay has remained practically unchanged, in inflation-adjusted terms, since the 1970s. Not counting overtime and other pay incentives, the average full-time employee in Canada received $27.60 an hour in 2017.