The Globe and Mail published an article today which focused on the increasing size of Canadian household debt from a recent survey conducted by the CGA. This trend should not really be that much of a surprise given the recent decline in stock portfolios, slowdown of the real estate market and increase in the availability of consumer credit over the past decade. It is interesting however, to look at the magnitude of household debt and to analyze the trends.
A stat that I found to be quite shocking was the fact Canadian household debt increased from $1 trillion in 2007 to $1.3 trillion in 2008. That is quite an alarming year over year increase. On a per Canadian basis that amounts to $39,597 per Canadian in household debt.
Another trend is that the composition of Canadian household debt is also changing. Instead of using debt to purchase assets such as vehicles, real estate or investments the average Canadian is increasing their credit card and credit line debt to fund consumption spending. Below are the top reasons that survey respondents gave for their increasing household debt.
Reason For Increasing Debt:
Day-to-day living expenses 58% Interest charges 27% Purchase of a new car 26% Purchase of consumer durables 25% Purchases of a new residence 19% Expenses for leisure and entertainment 19% Health related expenses 16% Enrolling in an educational program 10% Other 24%
It just goes to show that there are a lot of Canadians is living beyond their means who are using short term debt such as credit cards and lines of credit to fund their everyday needs. This is dangerous because it can be unsustainable over the long term. If someone loses their job or faces an unexpected expense while using debt to finance every day expenses then it can easily lead to personal bankruptcy.
The ratio of household debt to household assets has also recently risen to 19% up from 14%-15% over the past decade.
Key Takeaways
The key take always from these figures is to always try to live within your means and not over extend yourself with debt. I feel that a lot of people got too excited over the past decade when assets such as real estate and stocks were on the rise and piled on more debt then they could handle with the assumption that it was fine, as long as their asset base continued to appreciate. As we’ve seen over the past year and a half asset bubbles can correct and correct quickly leaving all those with a high debt load in a terrible squeeze as conditions deteriorate.
