It turns out that we Canadians really like our debt.
According to this Globe and Mail article, Canadian household debt has ballooned 250% from 1989. Household debt reached 1.4 trillion dollars, working out to almost $42,000 per Canadian. Remember folks, household debt does not include mortgages.
Further on this point, it turns out that a half a million Canadians would have difficulty making ends meet if mortgage rates rose to 5.25%. If you add that to the 375,000 Canadians who are already facing challenges paying off their mortgages, you have close to a million Canadians who could very realistically have problems making ends meet.
Throughout the recession Canadians took on more debt, something the exact opposite of recessions past. Having problems making ends meet? No problem. Just charge some stuff on the credit card. Add in every industry from housing to autos to everything in between offering cheap money to purchase stuff and it’s no wonder we’re at this point.
You’re not in this boat. You’re smart enough to read personal finance blogs, pay for things in cash and not blow your brains out buying a house you can’t afford. Good for you. Just keep in mind that the next time you’re talking to your less financially savvy friends, they’re in this boat. Take a little time to feel pity for them.
For the most part, people were smart enough to take out fixed rate mortgages. Fixed rate mortgages of 5 years or longer currently make up about 70% of existing mortgages. According to CAAMP, the industry average is that an average 5 year fixed mortgage is 3.5 years, before it is either broken because of a sale or refinance. What are all these people going to do with no home equity? Or even worse, negative home equity?
Paying off high interest debt used to be easy. Wait 5 years until your mortgage was up, then cash out the equity to pay for the stuff. Sometimes people didn’t even have to wait that long. That party is coming to an end very quickly.
Simply put, the era of easy credit is ending. There won’t be one major event, rather a slow unraveling. The housing market will stagnate in a best case scenario and correct sharply in a worst case. The market will continue to be flooded with listings, with more and more coming in at unrealistic values, because the owners have a negative net worth except for their “equity”.
We won’t have a U.S. style housing meltdown here. We don’t have low teaser rate mortgages. Our lending standards, for the most part, are pretty good. We don’t let people deduct their mortgage interest on their tax. We’re not in insane territory like they were. We’ll just see a nice bear market.
If you are one of the dumb people who have all this household debt, make the changes you need to start paying that off. There are countless resources out there to help anyone who doesn’t know where to get started.