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2015-07-24 23:10:30

How Consumer Culture Increases Personal debt levels

Economists have been sounding the alarm about consumer debt for the last few years. Yet despite all the warnings, a new Statistics Canada report suggests Canadians continue their free-spending ways, which experts say is due to a carefree outlook on borrowing money. We have been given a false sense of security thinking that interest rates are at an all-time low, and life is great. Unfortunately, this is not true for many of us and reality says interest rates will eventually rise and life will become a challenge.

A recent report by Equifax stated that the total amount of Canadian credit market debt — a figure that includes mortgages, non-mortgage loans and consumer credit — rose to $1.529 trillion at the end of 2014. Most of this increase was new mortgage debt, suggesting Canadians are continuing to take advantage of lower interest rates to invest into the ever-bubbling housing market. According to Statistics Canada, Canadians' debt-to-income ratio in the fourth quarter of 2014 was at an all-time high of 163 per cent. That means for every dollar of income, Canadians carry $1.63 of debt. Some front-liners in the credit counselling industry say that the biggest problem for most people is credit cards, which are much too easy to obtain and therefor encourage people to fulfill all of their consumer desires on credit. Many cardholders don’t know the average interest rate is about 20%.

But credit cards are only one small part of the larger picture. Another reason is that banks are coming up with all these unique and different ways of lending money all the time. Home equity loans, which allow consumers to borrow on the value of their homes, have been especially popular in recent years, as have bank car loans. Moody’s investor service reports that bank car lending has grown at an annual rate of 20 % since 2007 but by far the biggest component of household debt is mortgages.

Given the seemingly unstoppable rise in home prices in Canada's biggest cities, consumers are taking on massive mortgages to get into the housing market. The main reason Canadians have been able to take on more mortgage debt is because interest rates are at an all-time low. People always think the Bank of Canada is there to help us borrow money but it really is just there to make sure inflation stays in check. Even so, a recent report from the McKinsey Global Institute says that between 2007 and 2014, only one country had larger growth in household debt than Canada - Greece.

While many experts blame Canada’s debt spiral on consumer temptation, an abundance of attractive borrowing options and a collective lack of impulse control, our government must shoulder some of the blame. An economy is a simple accounting relationship in which transactions take place, namely businesses and households but also between the public and private sector. In order for the economy to grow, there must be at least one sector that spends more than it receives. In other words, somebody has to go into debt. After the global financial meltdown in 2008, the Canadian government ran deficits in order to stimulate consumer spending and allow households to pay off some of their debt. In recent years, the federal government especially has been aggressively trying to balance its budget, which can mean less disposable income for the many families relying on that spending. A deficit in the public sector is a net saving in the private sector, so if the public sector reduces its deficit, it's simply destroying savings of the private sector, and guaranteed, it's going to hit the household sector.