Canadians warned to climb out of debt before it’s too late, as threat of cooling housing markets looms
Scott Hannah says low borrowing costs and rising home prices have lured Canadians into a debt trap they may not escape if looming economic threats materialize.
Hannah, president of the Credit Counselling Society, is seeing an influx of clients as higher financing costs begin to bite and people find it harder to manage. Phone calls were up 5.3 per cent in the first quarter from a year earlier, while online chats increased 40 per cent.
He says with debt loads at a record and little in the way of savings to fall back on, Canadians may be “caught off guard” if housing markets cool significantly or North American Free Trade Agreement talks go sideways.
“We’ve been in a perfect storm for a number of years” where low interest rates encourage borrowing and discourage saving, Hannah, 60, said by phone from the Vancouver suburb of New Westminster. “People have been lulled into a false sense of security.”
Hannah’s organization can help people set up a debt management program or find a licensed insolvency trustee. He’s sounding the alarm as rising interest rates and stricter borrowing rules threaten to squeeze households even further. The Bank of Canada is expected to raise its benchmark rate twice more this year and its next decision is April 18.
Credit Relief
Hannah’s colleagues dubbed him “Dr. Debt” after he received an honorary degree in 2012 from University Canada West, a private business school, for his “distinguished service in the field of credit counseling.” Prior to establishing the non-profit, registered charity in 1996, he worked for 11 years at Equifax Canada, a credit reporting company, but decided “a nice title and a good salary doesn’t make you happy,” so he left to find something that “made a difference.”
He found it by helping people get relief from their creditors. As Hannah tells it, during the early 1990s, the provincial debtor assistance program in British Columbia was cutting back just as bankruptcy rates were rising. A group of banks, credit unions and department stores tried and failed to establish a complementary service. Hannah offered to raise the necessary funds, so long as he was allowed to run the organization.
Drop in the Bucket
Twenty-one years later, the society — with offices from the provincial capital in Victoria to Ottawa — has assisted more than half a million people. The average client is 43 years old, has $31,000 in outstanding debt and seven creditors. More than half are female. Average gross monthly income is $5,200, and housing costs consume 42 per cent of their net income. The society’s clients repaid $51 million last year, up about 6 per cent.
It’s still a drop in the bucket.
Canadian household credit totalled a record $2.13 trillion at the end of February, roughly doubling since 2006, central bank data show. Residential mortgages account for 72 per cent of that. The rest includes credit cards, lines of credit and auto loans.
People carrying large debt loads still feel ahead of the game because home prices keep rising, Hannah said. “What happens when the economy has a downturn, like in Alberta. We know what happened. We’re still seeing the impact of that,” he said, adding people in the oil-rich province were “caught off guard, and because of a lack of savings, many people lost their homes, had to sell their assets and start over again.”
Some observers argue Canada’s household debt isn’t a problem because asset ratios and home equity levels are also high and the country’s labor market is strong. A report from the Canadian Banker’s Association this week showed the national mortgage arrears rate through January was 0.24 per cent, close to the lowest in three decades.
Hannah doesn’t buy it. Low arrears and delinquency rates “don’t tell the whole story,” because a robust housing market is masking financial strains, he said. “If a person’s had difficulty keeping up with the mortgage payment, it’s been relatively easy just to sell your home,” said Hannah. “What happens though when you have a tight market and it’s not as easy to sell your home? That’s when you’ll see delinquency rates start to rise.”