Why Alberta’s debt is becoming a major problem
Canadians’ spending spree could be nearing an end, and Alberta consumers might be in even worse shape than most
by Michael Ganley
Debt. We’re all in it, whether it’s up to our knees, up to our necks or up to our eyeballs. We’re in it personally; we’re in it commercially; we’re in it municipally, provincially and federally. Albertans hold an average of $157,000 in household debt (the highest in the country), and Canadians owe, on average, more than $30,000 each for their portion of provincial and federal obligations. Consumer debt (that is, debt other than real estate debt) as a percentage of personal income has increased five-fold since the late 1970s and doubled over the last 20 years.
Illustration Michael Byers
It’s an orgy of debt and it’s gone on for more than a decade. We’re throwing a party and damn the consequences. We want the bigger TV and the newer car. No longer do we go into the bank and ask, “Can I borrow ‘X’ to buy a house?” We now ask, “What’s the very most you’re willing to lend me, and can I have it now?” Canada, with an average debt-to-income ratio of more than 150 per cent, now has the highest such rate in the Organization for Economic Co-operation and Development (OECD).
But after every excess comes the reckoning. For years now, Bank of Canada Governor Mark Carney has been warning about Canadians’ personal debt levels. We’ve all watched as millions of Americans have seen their houses go “underwater,” meaning he or she owes more on the mortgage than the house is worth.
But still we continue. The reproaches fall on (mostly) deaf ears, and our level of borrowing continues to rise steadily (albeit at a slower rate than in years past). “When you hand out crack cocaine on the street corners, you’re going to end up with a nation of addicts,” says Garth Turner, the former MP who incessantly records the ballooning housing and mortgage markets on his blog. “I don’t think the country has ever had more of a debt conundrum than we’re in now, and most people have failed miserably at managing their debt, mostly because it’s so damn cheap.”
Craig Alexander, the chief economist at TD Bank Financial Group, has been one of the country’s most vocal critics of Canadians for carrying so much debt. He says that right now, most are able to meet their financial commitments, but this is largely due to low interest rates. “What we really worry about is what would happen if there was a major shock,” he says, “and the two shocks you worry about are a sharp increase in interest rates, which would increase debt-service costs, or a sharp increase in unemployment.” He doesn’t see either on the horizon – “although if Europe lost control of its financial crisis, we could have a renewed global recession.”
There is such a thing as good debt. it’s the kind that helps you meet your mid- and long-term goals. Borrowing to finance a home or start a business, for example, or taking out a tax-deductible investment loan that boosts your savings can be good debt. Even a student loan that will, hopefully, turn into a good job can be considered good debt.
The problem is that so much of the debt people have is of the bad kind. It pays for short-term lifestyle items. It’s a “no money down, no payments for a year” couch or a home equity line of credit (HELOC) to finance the new kitchen or the biggest mortgage you can possibly get.
Bruce Beggs has seen more than his fair share of people in debt trouble. He’s an associate partner in Deloitte’s restructuring practice in Edmonton. He helps people and businesses file for bankruptcy or take the intermediate step of filing a “consumer proposal,” under which borrowers say to creditors that they can’t repay all their debt and make a plan for paying some of it back.
Beggs says it used to be that people seeking his help would have between $20,000 and $50,000 in unsecured debt. Now they often have between $50,000 and $90,000. Then there are the mortgages. “The mortgages are so high these days,” he says. “We used to see people with $200,000 mortgages coming in. Now we have people coming in with $800,000 mortgages. You’d like to think that if you have an $800,000 mortgage, you’re a wealthy person, but that’s not always the case.”
And, to compound the problem, it would appear that most Canadians are hallucinating. A recent Bank of Montreal study found that 54 per cent of indebted Canadians expect to have paid back their borrowed money – including mortgages – by 2017.
The fact that Albertans have the highest incomes in the country doesn’t seem to be helping us, either. Albertans filed 3,011 consumer proposals last year, up from 2,720 the year before. Beggs says many of the people he sees are high-earning oilfield workers. “They earn it like crazy and they spend it like crazy,” he says. “They go and earn their money, thinking they’re going to save and maybe get out of some of the situations, but they come back and realize a lot of [creditors] are pursuing them and they have no ability to pay.”
One good stick for measuring your status, Beggs says, is your credit card balance. If you’re not able to pay off the entire balance each month, you should be concerned. Perhaps it’s time to reduce discretionary spending until it’s paid off, or to consolidate debt into a lower-interest option.
Alexander says people should ask a financial planner what would happen to their monthly payments if the interest rate went up two percentage points. “If the answer is, ‘You’ll be OK,’ then there isn’t a problem with carrying debt,” he says. “But if you do that calculation and come to the conclusion that you couldn’t meet your financial commitments, then it’s time to have a serious conversation about how to reduce the debt you have before the rates go up.”
Scott Hannah, the president and CEO of the non-profit Credit Counselling Society, says part of the problem stems from a breakdown in the relationship between debt consumers and the banks they borrow from. “We used to rely on our bankers and credit unions to give us advice and guidance,” he says. “But the marketplace has changed. Financial institutions now sell products and their goal is to maximize the number of products they sell. They can leverage an individual up to a certain level and be comfortable that the consumer will be able to pay it back with full interest. But it may not be in the customer’s best interest to maintain that level of debt.”
There has also been a cultural change. Canadians who lived through the Great Depression and the two world wars were huge savers, but every generation since has become less inclined to save and more inclined to take on debt. And it begins early. “When you go off to university now, you immediately get a credit card and take on student debt,” says Alexander. “If, from a young age, you carry debt, you become very comfortable with it. The challenge is that if you look back over the last two decades, we’ve been in a structurally declining interest rate environment.” That, he says, will change. It’s only a question of when.
But our addiction to debt has also been enabled by governments, retailers and the Bank of Canada itself: legalizing 40-year mortgages (for a time), allowing HELOCs for up to 80 per cent of the value of the house and maintaining interest rates at generational lows contribute to the temptation.
Over the past couple of years, the federal government and the Office of the Superintendent of Financial Institutions (OSFI) have taken steps to save us from ourselves. First, there was the ratcheting down of the maximum mortgage amortization period to 30 years (and, more recently, 25 years) and the requirement of 20 per cent down when buying a second property. Now, OSFI is proposing to limit HELOCs to 65 per cent of a house’s value.
Turner is unimpressed. “They’re really baby steps,” he says. “Credit is still the most available it has ever been and it’s still the cheapest it’s ever been.”
There are a couple of ironies in all this. The first is that while the value of Canadians’ assets has been going up in recent years, overall net worth has gone down. People have been borrowing against their assets and thereby eating into their net worth. Perhaps the most insidious form of this debt is the HELOC. People have built up a lot of equity in their homes, and they continue to nibble away at it, so their net worth is actually declining. “That is dangerous,” says Turner. “As you can well see in charting real estate values in Alberta, they can be quite volatile, and when you borrow against a volatile equity, that leverage can turn negative on you very quickly.”
Secondly, while the day of reckoning is yet to come for many heavy borrowers, people who are being fiscally responsible are getting hurt now. With markets going down and interest rates on savings accounts hovering not much above zero, they have nowhere to put their money. “The people that are spending more than they have are reaping the benefits of low interest rates,” says Beggs. “Granted, they’re helping the economy along, but they’re not being fiscally responsible.”
At some point, we’re going to have to pay the piper. The question is, will we demonstrate the self-control now to soften the blow? Ultimately, our fate depends on hundreds of thousands of people avoiding the temptation of cheap debt with the hope and expectation of a better future.
Any guesses how that will go?