I don’t mean to be a pessimist, but since the last time VICE Money covered Canada’s dire household debt situation, things have only gotten worse.
The Royal Bank of Canada released a very telling report this week on the state of consumer debt in Canada. Turns out, we Canadians cumulatively owe more than $2 trillion, a 5 percent increase over the debt level we recorded a year ago. And among our G7 counterparts, we’re at the top of the pack in terms of how much we owe.
The issue when it comes to owing this amount of money is of course whether we have the ability to pay it all back. According to RBC, our wage increases were so minuscule in 2016 that they were unable to keep up with the pace of borrowing, resulting in the average Canadian household owing roughly $1.67 for every $1 of income.
But the more important question is, why exactly are we borrowing so much? Where’s all that money going?
One clue can be gleaned from this spectacular piece of information: The average price of homes sold in Toronto in February 2017 skyrocketed 27 percent, compared with a year ago. Detached homes in Toronto suburbs are now dipping into the 1.5 million territory for the first time ever — completely and utterly unaffordable for so many of us.
One-bedroom condominiums, often viewed as a way for millennials to get their foot in the real estate door, are increasingly out of reach. While a simple search on realtor.ca (the listing service used by the majority of real estate agents) pegs the price of a one-bedroom condominium in the downtown Toronto area as roughly $390,000, the actual selling price of these units are often 15 to 20 percent more than that.
Just think about these numbers for a second. To afford a unit that’s, say, $400,000 in Toronto, you’d need a minimum downpayment of $40,000. You’re then saddled with $360,000 in debt, EXCLUDING the interest you pay on that debt. It’s financially absurd, on a mid-range income of $50,000 to $70,000, not to mention the emotional stress of being in so much debt. On top of all of this, you’re probably only getting a 500-square-foot pigeon hole, barely enough for two adults.
But yet, Canadians still do it, by the bulk. The breakdown of that $2 trillion debt figure is interesting — in 2016 alone, we accumulated $99 billion in mortgage debt, bringing the total number of mortgage debt in this country to $1.29 trillion. In percentage terms, 65 percent of total consumer debt here can be attributed to the amount you borrow for a home.
And there’s a reason for this. “Consumers’ ability to tap into credit sources has no doubt played a role in bolstering household spending as a share of the economy to an all-time high in 2016,” says the RBC report. Translation: It’s still much too easy to borrow money from financial institutions, which almost gives us the sense that we can afford what we’re borrowing.
So what’s really happening here is that we’re in this almost jubilant cycle of over-borrowing for homes, because the banks are telling us to go for it, and if we question whether we can really afford a $500,000 home on a measly $50,000 income, we’re told to fear not, because home prices are only going to go up, so you’re building savings anyway! To be fair, that has been true for the last decade or so, but history tells us that any bubble will eventually burst.
The RBC report has a sobering warning for Canadians, though. When interest rates rise, debt servicing costs, that is, the cash required to cover interest payments could be much higher than anticipated. So if you’re cutting it really close on your mortgage payments right now, with little room for savings, you might want to start constructing an alternative budget.
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