Canada’s Impulsive Buying and Soaring Debt Loads

Some comments yesterday by the International Monetary Fund about the housing market and household debt in Canada as detailed in this story at CBCNews prompted the retrieval of a draft post from last week on the subject that wound up getting dumped in the trash rather than moving in the other direction.

First, from the IMF:

“In Canada, the key priority is to ensure that risks from the housing sector and increases in household debt remain well contained and do not create financial-sector vulnerabilities,” the international body says in its twice-a-year report on the global economy that was released Tuesday.

“Thus far, mortgage credit growth has slightly decelerated in response to the measures taken by the authorities, including tighter mortgage insurance standards. If household leverage continues to rise, additional measures may need to be considered.”

You’ve got to give our neighbors to the north some credit for steps they’ve already taken to cool what appears, until recently, to be a nearly unstoppably housing bubble.

Among other measures, they’ve reduced mortgage terms to 25 years, thus increasing monthly payments (all else being equal), however, they’ve still got very lofty home prices in the major metropolitan areas and, in places like Vancouver and Toronto, there have been steep declines in home sales in recent months, the latter seeing a record low in new home sales in August as reported by the Financial Post.

But, it’s more than just housing…

Two stories at the Globe & Mail last week sounded the alarm on the unsustainable rise in debt levels in Canada and, more importantly, the carefree attitude that most of the public has toward this development, views that are reminiscent of those in the U.S. about seven years ago when many home equity rich Americans were translating their new-found housing wealth into not just the amount of extra money they have to spend, but into how much new debt they could service.

In Majority of Canadians remain ‘blasé’ about debt loads: survey it is learned that that most Canadians are quite comfortable with their debt levels and, in fact, appear to have become dangerously reliant on credit being available at today’s super-low rates to solve any financial problems that might arise.

The poll by Harris/Decima asked respondents how confident they were about being able to raise $2,000 within a month if an unexpected need arose.

While 55 per cent said they were extremely or very confident they could raise the cash, 92 per cent said they’d consider borrowing to come up with some of the cash.

The poll results come as Canadian debt-to-income ratios sit at a record 152 per cent and top officials issue warnings to start paying down debt before interest rates rise.

“It’s frightening to see that Canadians have become totally blasé about debt – it’s becoming their new ‘normal’ and they’re numb to this dangerous trend,” says Douglas Hoyes, a bankruptcy trustee with Hoyes, Michalos & Associates Inc.

“For many, the use of debt to not only pay for big ticket items like cars, but also to cover day-to-day living expenses, has become commonplace.”

I don’t know what the number is in the U.S., but my guess is that, after the last few years of deleveraging here, our debt-to-income ratio is well below Canada’s 152 percent and, what’s probably most disconcerting about Canada (as was probably the case in the U.S. around 2005), they don’t seem troubled in the least as nearly two-thirds of the survey’s respondents said they are comfortable with the situation.

In It’s a curse: Impulse buying costs Canadians thousands a year we find that Canadians don’t seem to care much about what they spend their money on (again spurring memories of American’s spendthrift ways when the U.S. housing bubble was fully inflated) with more than half saying they spend to cheer themselves up and only 20 percent saying they review their non-essential purchases on a monthly basis.

Remember this number the next time you’re simply in the mood to shop whether you need something or not: $3,720.

That’s how much Canadians spend a year, on average, for things they want but don’t necessarily need, according to a poll released by Bank of Montreal. Men, by the way, outpace women in that area by more than two-to-one.

“The majority shop to improve their mood, while nearly half regret purchases after the fact and sometimes spend more than they make on a monthly basis,” the bank said in the study by Pollara, released today.

Somehow, this sounds as though it isn’t going to end well, but, as we saw over the last decade, patterns like this can become entrenched and these trends last much longer than you might think.


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