Personal debt among Canadians has reached a 20 year high and now exceeds 160% of income, almost precisely the same amount which was present in the United States before the bursting of the government generated real estate bubble. Canadians have been enjoying an unprecedented period of economic stability, low interest rates, low unemployment and a dollar at parity with the U.S. greenback. Naturally these factors have encouraged Canadians to purchase real estate and increase personal consumption.
While debt accumulation was natural and expected, the beginning of 2013 should usher in a new era in the personal finances of Canadians. Here are five reasons why we should do everything in our power to eliminate credit card debt, reduce mortgage debt as much as possible, and start rebuilding our savings.
1. U.S. and European economies will remain vulnerable
Don’t expect the kind of strong American economic upsurge upon which our economy is reliant for deeper growth, the U.S. is too politically mired to structurally reform itself. America will still be vulnerable to economic shocks and political indecision, an employment slump or return to recession is possible as government debt continues to rise and economic fundamentals remain very weak. Across the pond many European countries will continue to slide towards bankruptcy as government raise taxes instead of cutting spending to deal with unsustainable borrowing. Weakness in these regions will dampen our economic strength and will keep the world economy exceptionally fragile. Greece, Spain, Portugal, and Croatia are among the few which will see their economies shrink in 2013.
2. Interest rates will have to go up soon
The Federal Reserve would be foolish to keep interest rates artificially low past 2014, inflation and prices are rising and criticism of the U.S. economy’s reliance on low interest rates is mounting. The Bank of Canada will have to escalate rates in response to a Fed increase and might have to raise rates earlier if inflation exceeds 2% before 2014.
3. The housing boom is finally cooling down
While a massive housing bust is only going to occur if a huge employment shock transpires, it is clear that housing prices and demand are beginning to plateau in many parts of the country. This means regions and economies dependent on residential construction and real estate, such as the Greater Toronto Area and Vancouver will have to prepare for slower growth and a less dynamic market.
4. Take advantage of strong banks, governments are doing more than ever to encourage savings
Canadians are serviced by some of the strongest banks in the world; high interest credit card debt should be weaned off through lower interest personal and student loans, 7% interest is better than 19% interest. Tax free savings accounts and generally declining tax rates should be taken advantage of; Canadians should reduce retail consumption and save more of their disposable income.
5: Listen to the experts
Former Bank of Canada Governor Mark Carney, along with countless academics, politicians, and public figures have been warning Canadians of high debt loads for many years now. While the temptation to take advantage of low interest rates is enormous, it is important to keep in mind that leaders of government and public policy are genuinely worried of the risks of skyrocketing debt. Nobody wants a repeat of the 2007-2009 financial crisis here at home.