Douglas P. Welbanks: Debt Canada 101

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      By Douglas P. Welbanks

      Household debt

      Canada’s award-winning mountain of debt apparently leads the world, according to recent reports published by CBC. This time we hear about household debt and overinflated real estate prices causing most of the trouble.

      The vague reference to household debt refers to both mortgage and consumer debt combined together. One type of debt relates to the inflationary high cost of housing and the other to consumer spending, two very different types of debt.

      The mortgage side of the debt fence is attached to assets—houses. To get an accurate picture of how bad Canadians are in debt, any prudent analysis would subtract the value of the houses from the mortgages that secure the debt. In the current situation, a respectable surplus (equity) would result.

      The fear then shifts to overinflated house prices and what would happen if a market correction reduced property values to more reasonable levels.

      In other words the finger for the high cost of housing points at real-estate speculation, not exactly the same thing as individuals and families trying to find a place to live. As the prices peaked at historic highs recently, so too have rental vacancy rates fallen to record lows, with rents reaching unaffordable highs in major urban centres.

      One could and should ask the question: why has real estate speculation thrived so well, so unhindered, for so long and allowed to inflate and overinflate housing to the present unaffordable levels—unaffordable for middle- and lower-income families?

      The next question: what have governments done to correct the cause(s) of overinflated real-estate values?

      Third question: what have governments done to provide affordable housing for middle- and lower-income families that get squeezed the hardest by prohibitive real-estate prices and landlords charging the highest possible rents?

      National debt

      According to the Canadian Taxpayers Federation’s debt clock, Canada carries $645 billion in debt. The Fraser Institute predicts that the national debt, including all provincial governments' debts, will reach $1.4 trillion in 2017. The U.S. reached $20 trillion in national debt in 2017.

      The national debt affects the economy in a number of ways. The interest paid could have been spent on other valuable social programs. Increasing debt levels threaten the sustainability of future pension plans such as the old age security, family and disability benefits, employment insurance, health care, education, and training. Taxes will go up as debt levels go up.

      Consumer debt

      Consumer debt, which excludes mortgages, reached $591 billion in September 2017, as reported by the Bank of Canada. This is up from $200 billion in 2000 and $20 billion in 1975.

      Middle- and lower-income Individuals and families in Canada have been reliant on consumer credit since the 1970s to make ends meet. The inexorable rise of consumer debt tells a long story of wages not keeping up with inflation and the tremendous costs associated with raising children, housing, transportation, postsecondary education, cellphones, utilities, food, and so on. 

      Little has been done to reduce interest rates for consumers despite the historical low Bank of Canada lending rate. Record bank profits attest to the favourable treatment banks receive from governments.

      At $591 billion in consumer debt, it is very difficult to foresee debt freedom for individuals and families unless wages go up to sufficiently cover all of the annual and monthly family expenses without the need to borrow, and  if interest rates on credit cards and loans are reduced sufficiently to facilitate the repayment of the principal amounts borrowed.

      Concluding remarks

      Debt is all around us and continues to grow. Unless the central causes for the dependency on credit are decisively targeted, a repeat of the credit crunch in 2007-08 is inevitable. In the cycle of borrowing from Peter to pay Paul, credit resources eventually run out, leaving debtors—consumers, homeowners, and governments—stranded in a malaise of debt.

      Perhaps a more accurate perspective of debt that includes mortgage, consumer, and government debt may promote a more comprehensive approach to affordable housing and the repayment of ever increasing debt obligations.

      Doug Welbanks is a former director of debtor assistance and debt collection for the B.C. government and the author of several books, including Unbreakable: The Ujjal Dosanjh Story and Julius Seizure: The Secret World of Bankruptcy, Debt Collection and Student Loans.