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Canadians Have An Income Problem, Not A Debt Problem

It’s not hard to find a report about the growing Canadian debt problem. Canadians owe $1.77 for every $1 they make. The average consumer owes $31,400 in installment and auto loans, while borrowing for credit cards and lines of credit average $18,500 per consumer. Finally, there are reports that nearly half of Canadians won’t be able to cover basic living expenses without taking on new debt.

Half of Canadians say they have less than $200 left over at the end of the month, after household bills and debt payments. Canadians’ household savings rate is an abysmal 1.7 percent.

Canadians have a major debt problem! All the warning signs are there. We’re overextended, borrowing to maintain our cost of living, and at risk of insolvency if a recession hits. It’s a crisis!

Our Affordability Problem

Not so fast. It looks to me like Canadians have an income problem, not a debt problem. Or, put a different way, Canadians have an affordability problem.

The median after-tax income for Canadian families is $71,700. Meanwhile, the average house price in Canada is $512,501. That’s an incredible 7x income! For reference, the typical rule of thumb for housing affordability is 2.5x income. That means Canadians should be buying homes worth $179,250.

The discrepancy is even more staggering in B.C. and Ontario:

Avg. house price Median income Affordability
British Columbia $696,115 $72,200 9.64x
Ontario $618,165 $73,700 8.39x

It’s not just housing. Child care costs have risen faster than inflation in nearly two-thirds of cities since 2017. It’s often the single largest household expense after rent or a mortgage. The median cost of child care in Canada’s largest cities hovers around $1,000 per month, with parents in Toronto paying $1,675 per month. The exception is in Quebec, where a universal child care program has been in place for more than two decades (families pay $175 per month for child care in Montreal).

Transportation is the next largest expense for Canadians. On average, we owe $20,000 on our vehicles. The average price of a new vehicle has risen to $37,577. Today, it’s common to see auto loans stretched out over seven or eight years. That helps lower monthly payments slightly, but families are easily paying $500 per month or more on each vehicle (with many two-car families).

Beyond Frivolous Debt

All this to say, it’s no wonder Canadians are struggling to get by from month-to-month. We’re accessing cheap credit, in a lot of cases, to fund basic living expenses or cover emergencies. It’s not like we’re out there buying diamonds and furs.

Furthermore, Scott Terrio, insolvency expert at Hoyes Michalos, says it can be misleading to suggest Canadians are so close to insolvency. He says there is a lot of runway between when someone is in financial trouble and when they file a legal insolvency.

“One can be technically insolvent for months, even years, before they need to consider an actual filing. We regularly have clients tell us that they should have come in to see us 12-24 months earlier than they did. That’s because there are all sorts of ways to stave off a legal insolvency.”

Indeed, there’s only about 55,000 bankruptcies and 75,000 consumer proposals filed by Canadians every year.

“And there are 37 million Canadians, so you do the math,” says Terrio.

It’s An Income Problem

No, we have an income problem that is crippling our ability to save. I’ve seen it firsthand. As a young homeowner, who admittedly got in over his head as a first time buyer, I struggled to pay my mortgage, buy groceries, and service my student loan debt (another issue altogether for young Canadians).

I had a roommate kick-in $400 per month for a while, but when he moved out things went downhill in a hurry. I started using my credit card to cover basic living expenses, but got into real trouble when I maxed that out and had nowhere to turn.

While I did take out a consolidation loan to help manage my debt, the real savior was when I got a promotion at work that came with a $12,000/year salary increase. That extra income gave me the ability to make my consolidation loan payments on time, not have to dip back into credit, and start establishing a savings plan.

Earning extra income, either through a promotion, career change, or side hustle, has been part of my financial success ever since. Without it, I might still be stuck in a debt spiral – living paycheque-to-paycheque with no path to financial freedom.

But not everyone has the ability to earn extra income. Wage growth is barely keeping up with inflation and hasn’t for many years since the global financial crisis. Salaries have been frozen in many industries, especially in the public sector. It’s tough to get ahead when you can’t even count on an annual cost of living adjustment.

Side hustles require time and skill that not everyone has. So we’re left to cut costs at the margins and hope that our pets don’t get sick, our furnace survives another winter, and our tires can last another year. There’s no room for error.

Final thoughts

Reports about our growing debt-to-income ratio and consumer credit are concerning, but should be taken with a grain of salt. As Terrio says, half of Canadians are not on the brink of insolvency. The vast majority of us faithfully repay our mortgages and consider selling our house a last resort (but it is an option).

Personally, I have a higher than average debt to income ratio, simply because I still owe $200,000 on my mortgage. And I don’t have much money left over at the end of the month because I try to optimize my finances so that every dollar of income is allocated towards “something” rather than just sitting in my chequing account.

It’s easy to wag our fingers at indebted Canadians and suggest they quit buying lattes and avocado toast. But in many cases it’s not frivolous expenditures that are getting Canadians into trouble. It’s regular, day-to-day living expenses.

Trimming expenses won’t solve these inherent issues. They require major life decisions, such as taking on a second job, going back to school, moving away from a major city to a more affordable area, paying large child care costs for many years to ensure both parents can stay in the workforce, or getting by on one vehicle instead of two. Not easy decisions.

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11 Comments

  1. Duncan Harris on November 6, 2019 at 1:48 pm

    “especially in the public sector” Really? I sense a bias. Where is this private sector that is outpaying the public sector? Did you factor in the value of indexed defined benefits pension plans for public sector workers, paid for by private sector workers who at best have defined contribution plans, while many have no pension plan at all?

    • Robb Engen on November 6, 2019 at 2:48 pm

      Hi Duncan, wages are indeed up in Canada (+2.9% year-over-year in August), led by the private sector: https://tradingeconomics.com/canada/wage-growth

      I do work in the public sector and wages have been frozen for five years. Furthermore, the AB provincial government wants to roll back public sector salaries by 2%.

      The comment was not meant to slight private sector workers, and I’m well aware of the disappearing workplace pensions (further highlighting the challenges I mention in the article). A teacher can go paycheque to paycheque, not saving for retirement, and be fine. The same can’t be said for an employee with no pension backstop.

  2. Andreas Doerig on November 6, 2019 at 3:20 pm

    Living within one’s means is something that most people are not comfortable doing in this day and age. Social media, neighbours etc all lead to “keeping up with Jones'” even if it is not affordable.
    Secondly, the belief that home ownership is a must, which goes against disciplined money practices (diversification, easy access to liquidity etc.) pushes people into situations that are untenable, especially in urban centers such as Toronto and Vancouver.
    And lower interest rates only add gasoline to the fire.
    This is a bubble that will burst and people will get hurt. Wages are only one part of the equation. First we have to take accountability for ourselves.

    • Heather on November 7, 2019 at 12:14 pm

      Most of us are comfortable living within our means, though. As Robb’s article points out, it’s increasingly hard in Canada to do so.

      Its not about social media or impressing the neighbours. It’s about the cost of living and wages we earn as Canadians.

      I shop at Costco, drive a used car, own a small home, and dress my child in clothing from the sales rack. I work full-time, contribute to a pension, and pay all my bills. It’s still not enough.

      Enough with harking back to the 1970s when homes were cheap, jobs were plentiful, and you pay for school by working summers. We live in a new reality.

  3. Chris on November 6, 2019 at 4:07 pm

    Great article, and I completely agree. My wife and I work in the public sector and her net pay is the same as it was 10 years ago! Mine has only increased slightly due to promotions. Each round of negotiations for a collective agreement takes longer and longer (literally years), only to get a “cost of living” increase that clearly does not keep up with inflation. Sure there is great job security and benefits, but life in the public service is not all that it is cracked up to be.

  4. Gin on November 6, 2019 at 5:56 pm

    Totally agree with your insight and perspective.
    Often a finger is pointed to living within one’s means, although the facts seem to bear out that cost of living for younger generations is higher now.
    Just 1 example of many articles quoting statistics https://globalnews.ca/news/3854264/boomers-gen-x-millennials-cost-of-living-canada/
    A friend of mine compares her daughter’s circumstances to her own where her salary comfortably paid for rent, living and savings. Her daughter, with a comparable job, is struggling to remain out of debt, living frugally and renting modestly. To be able to keep up with rent, she has had to move further and further away from work, finding cheaper places to rent.

  5. Shawn Lang on November 7, 2019 at 9:08 am

    I have little sympathy for people think about ultra lower interest rates pushed by central banks etc. is such a great thing. Andreas Doerig you are so right that most people have no idea housing prices are way out of whack because of these ultra low interest rates.

    As a small business owner here in Ontario I have maxed out my TFSA’s, individual pension plan with GIC’s. I am above my goal but had to increase my annual savings up by another 20%. Also, being debt free allowed me to exceed my retirement and savings goal.

  6. stan kozak on November 7, 2019 at 10:00 am

    Okay so let’s compare average income by province with average household debt as reported by Global recently. What does that say?

    Here’s how the provinces stack up by average consumer debt:

    1) Alberta – $27,871
    Calgarians carry a lot of debt but residents of Fort McMurray have even more: a whopping $37,345 on average. The province’s delinquency rate kept going up, by nearly 14 per cent compared to the first three months of 2016, but a much slower pace than through much of 2016, according to Equifax.

    2) Saskatchewan – $24,462
    The picture in Saskatchewan is similar to Alberta’s. Debt loads are high, but as the economy bottomed out, the delinquency growth rate is slowing down.
    3) British Columbia – $23,522

    In British Columbia, delinquencies were down: a 5.6 per cent decrease compared to the previous year.

    4) Newfoundland – $23,314
    Newfoundland may be in the middle of the pack as far as debt loads, but the province has seen delinquencies balloon as the local economy kept sputtering. “People in Newfoundland are having more difficulty making timely payments than in the other provinces,” Regina Malina, senior director of data and analytics at Equifax Canada noted.

    5) New Brunswick – $22,828
    The province had one of Canada’s highest delinquency rates, but that number was roughly stable compared to early 2016.

    6) Nova Scotia – $22,229
    Nova Scotia has Canada’s highest delinquency rate, at 1.81 per cent, a 8.2-per cent jump over the same period in 2016.

    7) Prince Edward Island – $22,131
    In Prince Edward Island the delinquency rate is 1.4 per cent, roughly the same as in the first three months of 2016.

    8) Ontario – $22,022
    Ontario, where home prices skyrocketed in early 2017 not just in Toronto but many of the province’s south, delinquencies dropped by over 6 per cent.

    9) Quebec – $18,617
    Quebecers have lower debt (for Canadians standards, anyways) and here, too, delinquencies dropped. They were down 5.6 per cent.

    10) Manitoba – $18,312
    Manitobans carry the smallest amount of consumer debt, on average, but delinquencies were up by over 10 per cent.

  7. Ripp Toff on November 7, 2019 at 8:31 pm

    I moved from TO to a small town, went back to school, got a job at a sector leading company at a wage just over minimum. Found them $250k of funding to build a lab, started a department that will put 2.5 MILLION on their bottom line within two years. Asked for a raise to the bottom of the pay range for someone running a similar established lab.

    They fired me for asking. When pressed, their strategy is to hire TFWs at minimum wage and pay someone $20/hr to run the lab, in direct contravention of the government funding agreement.

    Say what you want. The author is on point. Lots of jobs available. Few that pay the bills.

  8. Steve B. on November 8, 2019 at 1:06 pm

    Hi Robb,
    I agree with a lot of what you have written in the article, but I think that a lot of people have themselves to blame when it comes to debt. For me, I think the #1 culprit is buying more home than they can afford.

    The example you used for yourself personally was a good one. You (honorably) wrote that you ‘got in over your head’ when you bought your first place. I think many people do the same thing (but don’t admit it). It seems that Canadians think owning a home is some kind of right or have FOMO or whatever and buy a place they shouldn’t or can barely afford. Then, they have no money when the car breaks down or they want to take a vacation. Canadians will NEVER miss a mortgage payment, so debt gets racked up on credit cards and lines of credit and we end up where we are now.

    I made the choice to rent a small apartment I could easily afford and that would still allow me to save for retirement, travel, have money for car repairs, etc. Not saying I’m some kind of genius, but I’ve kept my expenses well below my income. Everyone can make choices, and the value of making informed, forward-thinking ones can’t be understated.

    Steve

  9. Maria Jenkins on November 9, 2019 at 3:37 am

    What is also not being considered, is that our children are being asked to take positions that pay minimum wage after years of attending and graduating university. This is most likely the first generation where education is not being valued and does not guarantee a stable job.
    Factor in that people are now subsidizing their children’s rent and expenses out of need and not status.
    My husband and I worked 2 jobs, used all of our savings and some of our Rsp’s to support our daughter’s education so that she would not have student loans. We thought it was worth every penny and that we would recover financially once she got a stable job. It hasn’t happend – jobs are extremely sketchy and unstable. Pay is ridiculous and somehow employers feel that paying minimm wage is sufficient compensation. Our daughter is a really hard worker with good work ethics. Let take this example – her rent is $1350 a month (in a basement), at minimum wage she would take home approximately $1450. Utilites, groceries, public transportion, incidentals, medical needs are not being addressed. One can say she made the wrong choice in choosing her apartment but that was the cheapest rent unless she wanted to live amongst prostitutes and drug addicts (no exaggeration). At this pace, our children have no hope of ever owning anything or saving a penny while more and more financial pressure is being put on extended families. I personally feel that we are all threatened financially, on a daily basis. We did not expect this new reality. We do not accept this – but here it is.
    My husband and I understand that retiring will never happen – we simply can’t stop the process or save enough for retirement now that we are drained and supporting two households. So yes, there is definitely an income problem. I wish bankers, our government and other financial institutes would stop reporting that people are being irresponsible but never has it been easier to get credit and loans. Think about that!

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