The Big Picture on Debt in Canada

Last week’s KBR reported on a recent Statistics Canada study, Changes in Debt and Assets of Canadian Families, 1999 to 2012, that confirmed a trend that Canadians are carrying more debt than ever before.

This latter trend, however, may recently have been reversed. In 2012, 71% of all Canadian families were carrying some debt, up from 67% in 1999. However, we also saw that median asset values held by those families had increased by 80%, rising more rapidly than their debt levels, which were up by 64%.  This latter trend, however, may recently have been reversed.

Let’s consider the trends in the study.  In the big picture, it seems that Canadian families may be doing better financially than some media reports would lead us to believe, mainly because of home ownership. If we look at the study data at a more granular level, though, we see that some types of Canadian families did not fare as well as others over the period covered by the report.

The study highlights that most of the increases in debt levels are linked to higher mortgage debt and, correspondingly, much of the appreciation in assets is attributable to rising real estate values. Therefore, it is not surprising to see that asset values did not rise sufficiently to offset increased debt levels among non-homeowners, single people, and families whose major income earner was between 15 and 34 years old.

At the opposite end of the spectrum, median debt for families in the 55-64 age group rose by $23,100 over the study period, while their assets increased in value much more significantly, by $252,700.

Median debt for couple families with children under 18 more than doubled, while their median assets increased by 86%. Median debt increased less dramatically for families without children under 18 (up $42,500 or 88%), and their median assets also improved in value significantly (up $253,200 or 78%).

Looking at family debt ratios can offer additional perspective on these numbers. Median debt-to-income increased over the period of the study from 78% in 1999 to 110% in 2012, while debts-to-assets remained relatively stable over the period of the study, with median family debt at about one-quarter of assets in both 1999 and 2012.

Although the StatsCan study shows us increased levels of debt among Canadian families are in the context of asset values that are also rising, lingering debt levels are still a concern for average Canadians. Recent economic data warn of the risk of deflation, which actually increases the real value of debt. In the big picture, paying down debt remains a high priority for every Canadian.

Advisor Alert: It’s important for you to keep informed on economic data and to educate your clients on what it all means to them. Keep yourself relevant by explaining to your clients how big-picture economic trends affect their net worth, how to hedge against any risks, and how to adjust their wealth planning accordingly based on the changing economic environment.

Consumer Alert: With 71% of Canadians carrying some debt in 2012, according to the StatsCan study, chances are that you are one of those people. Recent economic data and forecasts indicate an increased risk of deflation in major economies around the world, which will have the effect of increasing the real value of debt. No matter how much debt you are carrying, or how dramatically your assets may be rising in value, focusing on minimizing your debts will improve your chances of financial success.

Debt is a large problem in many households. Wealth advisors need to see where the debt lies, how to help the client use debt in a healthy manner in order to accumulate, grow and preserve wealth. Click here for more information about Knowledge Bureau's Debt and Cash Flow Management course. This course focuses on the relationship an advisor has with a client who is contemplating taking on debt or is struggling with debt.