Sunday, October 22, 2006

Canadians' Personal Debt at Historic Level. No Savings?

Drop the Debt

Ever wondered how some of your neighbours afford their nice big house, that Lexus or BMW SUV sitting in their driveway, the yearly holidays to exotic destinations? You are not imagining things: These days, you don't need the right income to live the middle-class lifestyle. You just need credit, and there is plenty of it to go around.

It has never been easier to give the appearance of greater wealth. Families are borrowing off home equity, using multiple credit cards, taking on bigger mortgages and using a proliferation of short-term loan services.

Canadians are borrowing themselves into debt to live in the right neighbourhoods and send their children to the best schools.

It is the "credit generation." Not only are people borrowing more, the savings rate in Canada is next to zero and hasn't been this low in close to 80 years.

Household debt rising twice as fast as disposable income over the past 15 years. Canadians were 7% more indebted than they were the previous year, and 20% more than they were at the beginning of the decade. The trend is continuing.

The appetite for more and more credit is being fed by a growing network of services catering to people who want to live a notch above what their income allows. Consumers can drive luxury cars without buying them, there has been an explosion of payday loan shops, there are furniture loans that put off payments for months. Even private schools, once the domain of the rich, are more affordable because of various financial aid programs such as monthly tuition payment plans, deferred-payment plans, scholarship or partial subsidy programs offered by an array of outside groups. Then there are banks, which are increasingly in competition to lend money.

All of this has been aided by low interest rates, which make borrowing cheap. The housing boom has also made some people feel richer and led them deeper into debt. Some have traded up to bigger houses, but others are borrowing more based on the increased value of their home. On paper, they may have made, say $20,000, as the value of their home went up, so they go to the bank and borrow off that equity. They also gain more confidence about their financial picture and aspire to live better.

People are also not putting money away as they should. Canadians aged 55 and older are the only group of what he calls active savers. Younger consumers are passive savers and will, for example, count money they've made on paper in the housing market as their savings.


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