Jan 242019
 

Putting Household Debt into Perspective

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Canadian households currently owe more than $2 trillion. Our average debt to income ratio increased to 170%, making us number 1 among the G7 countries. 🙂

But do we actually have too much debt? Well perhaps not. Comparing Canada to the G7 group conveniently omits other highly developed countries. Australia’s national broadcaster claims its country has a household debt to income ratio of 200%. And reports of Netherlands, Denmark, and other Nordic countries are even higher than that! So in reality Canada is far from being the most indebted country in the world.

The cost of borrowing also affects the degree to which people will go into debt. For example, in the U.S. a typical mortgage today would cost about 4.5%. But in Canada you can get a mortgage for only 3.0%.  If the debt is cheaper to service then people will be naturally inclined to borrow more. 🙂

There’s a whole slew of other economic, legal, and political variables that make it nearly impossible to accurately compare household debt from one country to another. These kinds of comparisons would never be published as a scientific study because you have to correct for way too many variabilities. But they make for intriguing headlines nonetheless. 🙂

Separating Facts from Fiction

Here’s another debt related article that has recently attracted plenty of attention. 😀

Apparently nearly half of households are on the brink of financial turmoil. But how valid is this claim? Let’s do a little digging.

First, we can ask who is behind this poll? According to the CBC article, the survey was commissioned by MNP Ltd. A quick internet search reveals that it’s an accounting company that offers debt consolidation and consumer proposal services. What would happen to MNP’s business if more Canadians reach out for financial help because they become more worried about their debts?

We can also look at the evidence that backs up this claim. The results of the poll were self reported by consumers. And it’s not even a random sample of the population. The conclusion ends up being very subjective, especially when the term, “financial insolvency” isn’t clearly defined in the context of the survey. The Financial Post says that delinquency rates of Canadians have ranged between 1.6% to 1.1% over the last decade or so. Even credit card delinquencies (90 days late) have been relatively low, currently under 1% of debt balance. Consumers can be highly elastic with their spending. So the best we can gather is that many people are feeling the pinch, but that’s about it. We certainly don’t have 46% of Canadians are on the brink of filing for consumer proposal with a bankruptcy trustee on a monthly basis.

Finally, we’ll look at a headline from last month stating how unaffordable the housing market is.

Wow. “Crisis Levels,” eh? Once again, these kinds of titles are designed to attract attention and clicks. But as everyone knows, real estate is local. We can’t condense a diverse segmented market into a single generalization. Other than 2 major cities, the rest of Canada looks quite affordable. For example, the typical house costs less than $350,000 in Montreal, which is one of the top cities to live in according to The Economist. So you can enjoy a high quality of life and not be house poor. 😀

Don’t always believe extravagant sounding headlines. There are lots of fake news out there so we should take them with a grain of salt. We need accurate information to make wise financial decisions. Practicing a little bit of independent thinking can give us an overall better picture of the world than what’s only promoted in the news at face value. Navigating digital information can be challenging. But with a little skepticism and some original research we can usually find the truth. 🙂

 

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RICARDO
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RICARDO

If it can’t be hyped then it is not newsworthy.
That is how they get and hopefully keep your attention on their posts – hopefully for a few days at least – until the next hypeable story comes along.

RICARDO

Lee
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Lee

‘First, we can ask who is behind this poll?’ and then ‘look at the evidence that backs up this claim,’ thank you for reminding us all that we need to ask the right questions and think about what we read. Headlines make me crazy these days. Always enjoy your blog!

DeepThoughts
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DeepThoughts

You mention real estate prices are localized, but so are incomes (provided you work outside of government, of course). The ‘affordable’ homes outside the metropolitan hubs of Toronto, Montreal, Vancouver etc are actually quite expensive given the bleak job opportunities.

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[…] Freedom 35 Blog tackled that same debt survey that got me so pissed off the other day and came to pretty much the same conclusion. I’m glad we fought back against that b.s., even just a little […]

David
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David

Ok so you found a few missing outliers, but there’s no question Canada’s debt to income is high. The real conversation should be about why, which is combination of two factors:

1) the numerator: government-induced policies limiting competition and inducing inflation in many items like insurance, health care, high taxes, etc. drives people to accumulate debt to compensate

2) the denominator: low productivity and innovation likely again related to government policy creating a widening productivity gap with the United States and high relative immigration, are holding down wages in Canada from what they could be if Canada were achieving more of its potential on productivity and innovation

The debt to income trend will obviously continue indefinitely as #2 is mostly structural and will take decades to correct, though #1 can be more easily fixed.