Are we richer or more in debt?

The news about the savings rate and the indebtedness of Canadians seems contradictory. What should we understand?

Last week, Bank of Canada Deputy Governor Paul Beaudry delivered a speech to the Ontario Securities Commission that made headlines in various media. It turned out that the number of highly indebted households has started to rise again. By the end of the year, the central bank expected it to reach, and even exceed, its 2019 level of more than 16%, according to projections.

At the same time, we see that since the pandemic, the savings rate of Canadians has reached record highs, going from a meager 3% in early 2020 to 11% in the third quarter of 2021, and even to 14% in the second quarter of the same year! It’s hard to know whether to worry or rejoice… Renowned economist Pierre Fortin, professor emeritus at the University of Quebec in Montreal, helps us untangle all of that.

A heavily indebted minority

You should know that if savings have risen it is because there was hardly any opportunity to spend in the middle of the health crisis. Several of us were also very careful financially, not knowing what the next day would be. In addition, there is help from the government, which has helped those who have lost their jobs. Collectively, we have also reduced our debt by paying off our cards and lines of credit.

The other side of the coin is that the mortgage debt on new loans has grown rapidly and the proportion of those with a very high loan-to-income ratio (more than 450%) has exploded. The housing market frenzy and the explosion in house prices have certainly had something to do with this.

Pierre Fortin is hardly moved, stressing that this trend mostly illustrates the fact that since income and savings are on the rise, it makes sense for mortgage debt to follow a similar trend. In fact, banks are more inclined to lend more to people with good incomes, a well-stocked wool sock, and little consumer debt.

In addition, low interest rates make debt management easier, even when it is high. And that is exactly what is happening with the minimum rates as we know them.

However, the situation could worsen if the Bank of Canada decides to intervene to limit the rise in inflation. It plans to raise its key rate in 2022, which will necessarily impact interest rates on various types of loans, particularly mortgages. For the highly indebted part of households, the consequences could be regrettable, and that is what we will have to watch in the coming months, according to Pierre Fortin. That said, we shouldn’t see a dramatic increase, but on the order of a few percentage points, which will limit the damage.

The fact is that the minority of Canadians who make a living by stretching their financial elasticity as much as possible remain highly vulnerable and could suffer greatly if certain threats materialize.

According to Pierre Fortin, an increase in unemployment associated with an economic slowdown, a sharp increase in mortgage interest rates combined with a sharp drop in house prices, which would cause mortgage debt to exceed the value of the property, would be an explosive cocktail. Be careful, many could be swept up in confusion …

>> To also read: Grow your savings


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