Tuesday, February 17, 2009

Debt, debt, and more debt . . . .

From the Financial Post.

VICTORIA - Many Canadian households carry debt loads in the "danger zone," says the executive director of the Ottawa-based Vanier Institute of the Family.

Average household debt rose to more than $90,000 in 2008, Clarence Lochhead told a recent meeting of Victoria's Association of Family Serving Agencies. The Vanier Institute is a non-profit agency promoting the well-being of Canadian families.

The total debt-to-disposable income ratio rose to 140% last year, Mr. Lochhead said, referring to the Institute's report, The Current State of Canadian Family Finances.

Last year, the average household income was $65,200, up by 11.6% from 1990. In that same period, spending jumped by 24.4%, total debt went up more than six times faster than incomes, and annual savings shrank, he said.

The median (mid-point) real earnings of Canadians, when adjusted for inflation, show little increases between 1980 and 2005, he said. Meanwhile, many citizens are overloaded at work.
The reward: "We got credit. We got a lot of credit," he said in reference to interest rates dropping in the past several years.

"But there was a whole, I think, really big cultural shift too in the way we think about spending, the way we feel about money, the way we feel about availability of credit - the push to spend when you don't have money," he said.

When spending outpaces income, families end up close to the edge of their monthly budget. Mr. Lochhead said it can be financially painful if they hit a bump in the road, whether it is due to the fallout from today's recession or a personal reason.

It is not irrational behaviour to pull back on spending, Mr. Lochhead added. He said that not all debt is bad, but rising consumer debt as a percentage of annual income is "problematic."
Looking at the examples from past recessions, Mr. Lochhead said it could take a long time to recover from this recession.

He also had advice for governments that plan stimulus spending, "At the provincial level, why don't we do something about social assistance rates?" That money goes immediately back into the local economy, he said.

"Any analysis of spending at the lower income end will show you that every marginal dollar received will be spent and there is a very high probability that it will be spent locally."

When we are talking about infrastructure, Mr. Lochhead urged looking at more than roads and bridges. "Let's talk about providing supports that are going to help families."


mohican said...

I am truly astonished whenever I hear statistics like this. I am amazed at the level of debt that people are willing to take on for consumer purchases like cars, tvs, and vacations. Crazy.

Traciatim said...

Mohican, Are you sure that's just consumer debt? I thought that was including all debt.

I came on here to mention how average I feel reading those stats. I have slightly higher than average debt because I've only been in my house a couple years so my mortgage is still around 100K, putting my total debt at about 120K. My family income is hovering right around the average.

So I live in average home on an average street, with a 4 person average family, making an average income, drive an average car . . . I need to get out more :)

Though, if I use 'net debt' rather than total debt I could probably walk from the house pretty even after the real estate vultures take their portions. At least it isn't vacations to the Dominican that I'm paying off, or an extra large SUV to show the neighbours how great I am :)

patriotz said...

Mortgage debt (for home purchase that is) is not consumer debt and should not be lumped together with it.

Mortgage debt is debt taken on to buy an investment, just as is debt in a margin account to buy stocks.

If the price paid for a house is greater than its fundamental value (i.e. there is a bubble) the house is not capable of generating the earnings (rental value) to service the debt, and the excess must be paid from the borrower's income. But that's still not consumer debt, rather bad investment debt.

Good investment debt (below fundamental value) is not a burden on the borrower because earnings from the asset are sufficient to service it.

Traciatim said...

What I wonder, for the purpose of the article does the quote "Average household debt rose to more than $90,000 in 2008" include or exclude mortgage debt.

I find it very hard to believe that the average home out there has 90,000 in loans and credit cards.