A Driving Force No More: Have Canadian Consumers Reached Their Limits?

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From CGA Canada
A Driving Force No More: Have Canadian Consumers Reached Their Limits?

Backgrounder
Since 2007, CGA-Canada has been monitoring collective attitudes towards spending and indebtedness. The fourth report in the series, A Driving Force No More: Have Canadian Consumers Reached Their Limits? identifies Canadians’ perspectives on the changing level of their indebtedness and wealth, and examines these findings in the context of publicly available facts and figures.
The key findings demonstrate that Canadians are continuing to struggle with record levels of household debt—defined as the outstanding balance of household credit, including consumer credit and residential mortgage credit – and reveal several alarming trends for those already feeling the strain of lower or stagnant incomes, or personal circumstances.
Key Report Highlights

While growth in household debt has moderated, this positive trend is not equally shared among all Canadian households

While the pace of debt expansion declined in 2010 and the first quarter of 2011, household debt levels still reached a record high of $1.5 trillion in the first quarter of 2011.
If household debt was spread evenly across all Canadians, a family with two children would owe an estimated $176,461.
While Canadian households tend to perceive their debt as decreasing, not all groups of households share this optimism. For example, while 37 per cent of indebted Canadians overall reported their debt as decreasing and 35 per cent as increasing, 46 per cent of lower-income respondents reported their debt as increasing. Households with one or more children were also much more likely to report their debt as rising.
Households with an income of $50,000 and under were six times more likely to be financially vulnerable in terms of debt-service ratio.
Single-parent families were the only category where debt increases with age, and they have two-thirds more debt than couples with no children.
More Canadians are carrying debt into retirement, with one-third of retired households carrying an average debt of $60,000 and 17 per cent carrying $100,000 or more.

Household balance sheet has not improved

The debt-to-income ratio reached a new record high of 146.9 per cent in the first quarter of 2011.
Increasing debt was not associated with an increase in income or wealth:40 per cent of respondents whose income decreased said their debt increased compared to 31 per cent for those whose income increased.
Consumption rather than asset accumulation remains the primary cause of the debt run up: 57 per cent of indebted respondents said day-to-day living expenses are the main cause for the increasing debt.
The degree to which consumer credit is backed by financial assets did not improve much, even though the growth in consumer credit slowed considerably in 2010. The amount of outstanding consumer credit for each dollar of household financial assets flattened at 10.9 per cent at the end of 2010 – virtually no different from the 11.0 per cent registered at the end of 2009, or 11.2 per cent observed two years prior.
The extent to which residential mortgages were backed by residential assets continued to deteriorate over 2010. This indicator stood at 65.7 per cent at the end of 2010, a level much higher than the 55.0 per cent average observed between 1990 and 2007.
By the end of 2010, total owner’s equity reached a 10-year low of67.7 per cent while housing equity reached a 20-year low of 34.6 per cent.

Ability to pay may be at risk

Not many respondents saw their income increase. Less than half(42 per cent) said their income increased, and for those that did, most (86 per cent) said it increased by only a little.
Half of all respondents believe that their financial wellbeing would be noticeably affected by a 10 per cent salary decrease.
Even with the temporary relief afforded by a credit card or line of credit,one-fifth of Canadians would not be able to handle an unforeseen expenditure of $5,000. One in 10 Canadians would face difficulty in dealing with a $500 unforeseen expense.
Canadians save even less than before. Some 27 per cent of non-retired Canadians commit no resources to any type of regular savings, not even for retirement. This is up from 25 per cent of non-retired respondents surveyed in 2007. Overall, four in 10 Canadians do not feel confident that their financial condition at retirement will be adequate.
The unemployment rate of those who have been unemployed for more than a year continued to increase and more than doubled from 0.4 per cent in October 2008 to 1.0 per cent in April 2011.

Regional differences continue to be significant

We can’t rely on the pan-Canadian perspective alone because it does not reflect the significant regional differences that are evident when we look deeper.
British Columbia has the highest debt service ratio, paying 9.4 per cent of disposable income to service debt interest payments. Residents of New Brunswick enjoyed the lowest debt-service burden that claimed only 5.6 per cent of their disposable income.
While 43 per cent of Albertans said their debt increased, compared to the Canadian average of 35 per cent, residents of Alberta were saving at a pace several times more than other Canadians.
In three provinces – Alberta, British Columbia and Saskatchewan – the number of mortgages in arrears continued to increase in 2010 while it declined in all other provinces.
While British Columbia registered one of the highest hikes in consumer insolvencies during the recession, this province also experienced one of the modest declines in the number of distressed households in 2010. Ontario was also among the leaders in terms of increasing consumer insolvencies in 2009, but registered the greatest decline in 2010.


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