Debt demons

You'd think the subprime lending crisis would teach us a lesson.

That debt sucks, and positive cash flow is a beautiful thing.

But no. Instead, Canadian families keep taking on more and more debt, owing $80,000 per household or 131% of their household incomes, according a new report by the Vanier Institute for the Family. That's up from 90% in 1990.

And we love living on plastic, with credit card debt almost doubling to $22,500 a household, compared to $12,000 in 1990.

The report also showed a disturbing trend that like our American cousins, we've taken on record debt to get into that new, more expensive home, thinking we'll never lose. After all, Canadians' real net worth jumped by 18% since 2000, with rising home values the driving force. In fact, take out real estate and the mortgage debt that supports price gains, and Canadians' net worth only jumped by 5%.

Nobody's calling for a crash in Canada. But, what if values did fall?

Could you afford that monster home?

South of the border, where greedy, commission-hungry brokers pushed uncreditworthy consumers into 0%-down mortgages with cheap variable rates, the bubble did burst. And now it's not the poor house, they fear the most.

It's no house at all with millions losing their homes, with foreclosure filings up 80%.

The good news is real average household incomes in Canada actually increased in the past four years, thanks to improved hourly earnings, more earners per household and tax cuts. The largest hike of 2.6% took place in 2006.

But the bad news is debt rose seven times faster than incomes -- with Canadian households now drowning in a sea of red ink that's hit over $1.1 trillion.

Meanwhile, personal savings rate have plunged from 10% in 1990, when households saved about $7,500 of their annual incomes, to just $1,000 or 1%.

Overall, Canadians' net worth is up to $395,500 in 2007, compared to $235,700 in 1990 -- a 68% increase. And this time gains on assets, like real estate, pension and shares outpaced gains in debt. That means the ratio of total debt to net worth is now 20%, down from a 22% ratio in 1990.

But don't be smug. A stock market meltdown, sparked by the subprime crisis, is now hurting many investment portfolios.

Meanwhile, bankruptcies and proposals soared to more than 100,000 last year, while MacKenzie Financial's latest Burn Rate report shows 56% of Canadians less than 50 years of age demonstrate troubling "overspending tendencies."

"This study shows that younger Canadians are spending first and asking questions later," said Dr. Sunghwan Yi, a University of Guelph researcher and expert in consumer behaviour. To see how fast you burn through money, take the Burn Rate test at www.burnrate.ca. I say it's time to get out of debt.