Credit Canada counsellor Randolph Taylor poses with jars of cut-up client credit cards at his office in Toronto. “I’ve seen people whose mortgage and property tax payments, together, eat up more than 70 per cent of their net pay. It should never be more than 35 per cent,” he said.
MIKE CASSESE/REUTERS
TORONTO — The two giant jars on Randolph Taylor’s windowsill are filled with shards of credit cards, chopped up by the clients whose staggering indebtedness drove them to the front line of Canada’s household debt crisis.
“I used to cut them up myself, but then I saw that having them do it themselves was a huge symbolic act,” Taylor said, pulling out a pair of scissors from his desk drawer in the Toronto headquarters of debt counselling agency Credit Canada.
“I tell them this card is the reason they are here. This card is the reason they haven’t been able to sleep.”
The growth of household debt in Canada to levels approaching those seen in the United States before the 2008-2009 crash seems to be keeping a lot of people awake — from central bankers to economists, lenders, real estate agents and the indebted consumers.
Bank of Canada Governor Mark Carney has warned that the ratio of debt to income will rise from the already alarming 153 per cent record reached last year, and many think it will approach the landmark 160 per cent hit by the United States before the U.S. tipped into crisis more than three years ago.
While Canada has spent the last few years boasting of its escape from the global credit crisis and its quick recovery from recession, both Carney and Finance Minister Jim Flaherty are sounding the alarm on household debt, warning it has become the biggest homegrown risk to the financial system.
“Obviously the biggest concern is taking extreme levels of debt for those who are most vulnerable,” Carney said in mid-January, pointing to a “potentially overvalued” housing market that has roared higher for years, barely pausing when the U.S. market collapsed.
Carney, like central bankers the world over, has dropped official interest rates to historic lows to bolster growth, and suggested borrowing costs will remain low. The fact that his own policy made borrowing so attractive has not lessened his warning that sharp pain may come when rates do rise.
NO U.S.-STYLE MELTDOWN
The constant cry about household debt from Carney and Flaherty has sparked a debate about just how bad the problem is, with most concluding that it is quite worrisome and will end badly — but not as badly as in the United States.
“I am concerned about household debt. I do think ultimately this is going to end in tears, because inevitably rates are going to rise. And when they do rise, I think it is going to be a real shock to people,” said Craig Alexander, chief economist at Toronto-Dominion Bank, Canada’s second-largest lender.
In December, TD estimated the average Canadian home was overvalued by about 10 per cent, while others have predicted a 25 per cent drop in house prices. That would leave many homeowners underwater, unable to service their debts and risking default.
Still, Alexander said Canada’s more conservative lending culture may spare it from a U.S.-magnitude crisis.
“I don’t think we’ll have a U.S.-style problem … (because) financial institutions have been very prudent lenders, so we don’t have the same systemic risk the United States had.”
The Canadian Bankers Association, which lobbies on behalf of lenders, points out that 68 per cent of household debt is residential mortgages — loans that are backed by an asset and increase an individual’s net worth. Twenty per cent comes from lines of credit and only 5 per cent is credit card debt.
Mortgages are more conservative as well, with next to nothing of a subprime market.
The news on mortgages would be downright rosy except nearly everyone thinks home prices are unsustainably high, particularly in the two largest markets, Toronto and Vancouver.
Eerily reminiscent of the U.S. housing market five years ago, houses are listed mid-week, packed with buyers over a weekend open house, and sold, often with multiple unconditional offers well above the asking price, two days later.
“If a house goes on the market in a good area, it is insane. Anything under C$1 million, the activity at the public open house is nutty,” said Toronto real estate agent Valerie Cowie.
Cowie, who has been in the business for 10 years, estimates that more than 80 per cent of homes in the “active market” — priced under about C$1.2 million — get multiple offers these days.
And while it sounds like a good time to be a real estate agent, Cowie said it is hard on both buyers — who must bid wildly higher to win a house — and on sellers, who risk a deal falling through when the bid fails to be appraised at the higher price.
“The day will come when the seller can’t just ask for more, when the buyer won’t pay it. I look forward to that day. I look forward to the day the buyers just say no. No more,” Cowie said.
HOUSING MARKET MAINSTAY
The strength of the housing market is at the crux of the debt story in Canada, where home ownership is above 67 per cent.
Prices in major markets have marched higher for a decade, at an often double-digit pace. Housing prices rose 7.2 per cent last year while home sales increased 9.5 per cent to C$166 billion, according to the Canadian Real Estate Association.
While price increases appear to be cooling, competition to get into the market has spurred new homebuyers to stretch hard before they are priced out altogether.
Debt counsellor Taylor — the one with the scissors — has heard horror stories about unmanageable mortgage debt.
“I’ve seen people whose mortgage and property tax payments, together, eat up more than 70 per cent of their net pay. It should never be more than 35 per cent,” he said.
With housing eating up income, borrowers turn to credit cards or home-equity line of credit — the Canadian version of the U.S. refinance game — to pay for food and living expenses.
“They are borrowing from Peter to pay Paul,” Taylor said.
Credit cards are not hard to get. Just ask Michael Dynes, a seasonal concrete worker who found himself with C$140,000 in debt spread across 15 credit cards, plus a mortgage on his home in the resort town of Collingwood, 160 km (100 miles) north of Toronto.
“I always had a decent job, and credit was always easy, a little too easy, to get. And it compounds and compounds until you find you are paying more interest than you’re actually earning,” Dynes, 63, recalls of his debt crisis, which came to a head about seven years ago after he bought a boat, upgraded his house and added furniture.
“I think greed takes over, the want to be like everyone else, to have toys and bells and whistles,” he said. “I’m not a drinking man either, nothing like that. I’m just an average person who got way over their head.”
DOMINO EFFECT
Laurie Campbell, executive director at Credit Canada, a non-profit credit counselling agency that is funded by banks, retailers and other lenders, blames consumers, not lenders, for the credit mess she sees on a daily basis.
“What’s changed in the last 20 years is a ‘buy now, pay later’ mentality — savings have all but disappeared,” said Campbell, a 21-year veteran of the credit counselling business.
“A correction will hurt. There is no doubt in my mind, a correction will end up a landslide. It’s a domino effect,” said Campbell, whose north Toronto counselling office offers advice pamphlets in Spanish, Farsi, Russian, Tagalog and Chinese, as well as a crate of stuffed toys for children to play with while their parents are counselled about the family’s future.
Article source: http://www.thestar.com/business/article/1124059--canada-s-soaring-household-debt-is-going-to-end-in-tears
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