Growing up in a predominately Italian, Hamilton Ontario neighbourhood, debt was a cursed word. At Robert Floris’ Mortgage Architects office, we have preached this anti-debt slogan. But can it be that Canadian society has changed and I have missed some of the obvious signs?
Let’s first look at some history. As of last year, we only saved approximately 3.5% of our income as a nation. In 1982 we saved approximately 20%. That is one big drop! In fact, the country of Greece is the only country that saves less.
Most surprisingly is that Canadian homes earning more than $100,000 account for 37% of the total debt in the country. Household income between $50,000 and $100,000 represent 38%. In analyzing the data, the debt holders are really not the working poor or the holders of high paying credit cards.
There are four main reasons as to why this trend occurred. We will explore the main core of the following changes:
1.) Incomes have not been rising.
2.) Borrowing money today is cheap.
3.) Items which are important to Canadians such as homes and education continue to rise.
4.) Canadians have been socialized at an early age that debt is acceptable
Incomes have not been rising. In fact, the data is scary. From 1976 to 2009, median incomes only increased from $45,800 to $48, 300. This is only a 5.5% increase in over 35 years!! The average family is stretched and must use debt to continue lifestyle.
Let’s face it. Money is inexpensive today. In 1980, the prime rate was approximately 14%. Today, it is a about 2.85%. This has made items such as education, cars and homes more affordable. By having a lower rate and subsequently lower payments, Canadians are embracing debt.
Canadians enjoy a good lifestyle and homes and education continue to fuel this debt growth. With 70% of today’s workforce requiring post-secondary education and the government slashing grants, it is no wonder that tuitions will increase by over 13% throughout the next four years. Mortgage debt is what is really driving the debt ratios of most Canadians. The reality is that homes have increased so much from 1999. In fact, they have increased much faster than the mortgage rates have come down.
Younger Canadians today have accepted debt as a norm and have accepted it at an early age. As described above, young Canadians need education and are financing them with student loans and financing cars at an earlier age. It has been socialized in their every day life. For younger Canadians to hope to enjoy a better middle income lifestyle, they have had to borrow.
In conclusion, many Canadians really do need to borrow in order to prosper Let’s face it, education is really needed in this country. As well, Canada is a vast country and cars are needed. My big worry is homes. I feel we are hitting the wall where incomes are stretched and prices are getting pricey.
Something has to give.
Robert Floris is an independent mortgage broker from Mortgage Architects in Hamilton, Ontario.