In today’s business press debt has become the number one sin. A recent headline in the Globe and Mail’s Report on Business says that Canada is on a borrowing binge, which sounds like the admonishment dieters get when attending a weight-reduction program.
According to The Globe, it’s our own fault. Yours and mine, the ordinary citizens and taxpayers who have tried, but failed miserably to save. We are to blame for this sorry state of affairs. Instead of conserving our resources, we are drowning in more than $1.8- trillion of household debt —more than $50,000 for every man, woman and child in the country .
Comparing us to overeaters, Canadians are portrayed as reckless and indulgent borrowers unable to curb our appetite for home ownership, college educations or investment loans, which are all considered sink holes for “bad debt” by the Globe and Mail.
One article proclaims that “debt is on a par with…obesity, poverty or substance abuse.” The source of the sickness and the shame is that the ratio of debt to income is running at 163 per cent.
Fortunately, there is another side to this story. Benjamin Tal, a senior economist at CIBC World Markets says: “Everybody knows this number. It’s one number –a catch all – and it is almost meaningless,” he says. “There are several countries where the ratio is in excess of 200 per cent, and they’re coping just fine.”
According to Mr. Tal, the problem with the ratio is that it reveals almost nothing about the people who have debt. His issue is that the ratio compares debt to the incomes of all of us, many who don’t carry any debt at all and it implies that debtors won’t have enough income to pay off their debt. The catch is that the debt would have to be paid off all at once although mortgages are contracted for repayment over long periods of time, as much as 25 years or more.
So what is the fuss all about? Most of us realize we could not pay off all of debt on one given day and we’re not expected to do so.
Having a realistic plan based on current income and income projections coupled with the rise in the value of our homes, pension assets and investment savings is an eminently sensible way to manage our finances. Bemoaning all debt might cripple our ability to make informed decisions regarding household finances and could become self-defeating.
Close investigation into a study of “Changes in debt and assets of Canadian families, 1999 to 2012,” recently released by Statistics Canada paints a different picture than the one in which Canadians are portrayed as reckless spenders.
Among the most telling data gleaned from this report is that “between 1999 and 2012, median debt and median assets increased for most types of families, but not equally for all categories of families. Median debt, for instance, increased faster among those in the 35-to-44 age group, among couples with children, under 18, and among mortgagees.”
Of course! When those of us who are retired or approaching retirement think back to the middle years when we were raising young children and paying off large mortgages relative to our wages, we can only nod our heads knowingly. It is a very challenging time for most Canadians.
What is revealing is that debt levels are higher among mortgagees, university-educated individuals, couples with children, and people with higher family incomes. In fact, debt was highest among those in the top quintile of income earners.
Between 1999 and 2012, debt rose for the bottom quintile of family earners from $9100 to $12,000 while their assets grew from $19,800 to $24,000. For the top quintile of earners the picture is different. High-income earning families took on more debt during the same period, growing from $90,000 to $158,500, but these same families increased their assets from $492,400 to $1,023,900, a growth accumulation of $531,500.
In other words, well-situated middle-aged income earners are in debt, but they are also substantially building their assets. To argue that most Canadians are out on a “shop till you drop buying binge” with no view to their financial stability isn’t exactly accurate.
The net worth of older Canadians increased as well according to the Statistics Canada study. For those over 65 during the same period, the percentage of net worth of families with debt increased by 57.9 per cent and for those between 55 and 64 by 54.5 percent.
It’s easy to feel guilty, to blame ourselves for economic mismanagement when surveying the headline news even if we have made long-term prudent decisions about what kind of debt to take on.
Drilling down into the statistics help us to frame another picture, to feel confident going forth into older adulthood knowing that by staying the course: buying and paying down a mortgage, accruing savings in registered accounts, and counting on workplace and government pensions while studiously planning for a secure retirement is always the best route to take.
It’s understandable why we’d become disheartened by the headline news. In my own case, I carry a mortgage of $200,000 but I consider my home a solid investment. It has risen in value by more than 10 per cent to almost $700,000 since I purchased it 16 months ago. Bi-weekly mortgage and monthly property taxes are less than the rent I would pay for an apartment in the same area.
Although my investment accounts did well last year, I don’t expect to see more than a seven percent return given this year’s unpredictable world markets, and that’s if I’m willing to assume a substantial proportion of risk, more than I believe I’m taking with real estate.
If you are concerned about your financial future take the time to look closely at your personal balance sheet and how it compares to the Statistics Canada report. You might be surprised how well you and families like yours are doing. Debt is not the only measure of wellness, not by a long shot.