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Canada’s rising wealth under siege by growing debt

A man holds the new Canadian 100 dollar bill made of polymer in Toronto November 14, 2011. REUTERS/Mark Blinch

We may never agree on music, but Canada’s Baby Boomers and Millennials have more in common than we might think.

Recent data from Statistics Canada shows we’re riding a wave of unprecedented fortune, with the median net worth of Canadian families up 44.5 per cent from 2005 to $243,800 in 2012. That’s an 80 per cent jump over the 1999 median of $137,000, adjusted for inflation. Much of the increase is due to our frothy housing market as principal residences were found to be the largest asset among Canadians in 2012, followed by private pension assets, which include Registered Retirement Saving Plans (RRSPs) and company pensions.

Hold the celebration, though, because we’re also spending like never before. Between sky-rocketing mortgages, car loans, lines of credit and credit cards, Canadians, young and old, managed to rack up $1.3 trillion in debt in 2012, putting our collective wealth under siege by growing debt.

Kim Thompson, senior vice president of advisory services with the national wealth-management firm Credential Financial, has been following this trend closely and believes the statistics tell an interesting story about who we are and what we think about money.

Notably, the data suggests a shift in our comfort levels towards debt from one generation to the next, driven, in part, by low interest rates that “trick” us into thinking we can afford to consume more than we actually can or should.

“When you have access to inexpensive money, it is just that much easier to go out and buy things,” Thompson said in an interview with Yahoo Canada Finance.

Will Britton, a financial advisor with Marlin Financial Services in Kingston, Ont., has made similar observations among high-net-worth clients across generations.

“We’ve all got a lot of stuff,” he said of our growing inclination towards taking on debt.

Debt dependence: Who is to blame?

But our debt is not entirely the fault of our consumer choices. In many cases, it’s driven by circumstances largely beyond our control.

In some cases, particularly among older clients, said Britton, it’s the result of relying heavily on pension plans and benefits from an employer than don’t pan out as expected.

Or it could come about from a parent or grandparent using the equity in their homes to help younger generations buy into increasingly expensive markets.

Debt, often, is an option many people use to make up for a shortfall.

“It’s not uncommon,” Britton said.

Thompson said the statistics highlight a need for families to have a broader conversation about wealth and wealth transfer between generations in order to make sure we are protecting our assets.

“You have got to seek out financial advice … that helps you spend within your means. Don’t make decisions that are going to box you into a corner and get you into trouble,” she said.

A lot of it comes down to awareness,” agreed Britton, who recommends we put together a cash-flow plan or spending journal that helps us keep track of our money.

“It is just so easy to swipe or click or button and spend that money without thinking about it,” he said. “Suddenly, you get to the point where the credit card is maxed out. A lot of people are operating on default.”

Of the total debt owed by Canadians in 2012, $1 trillion (77.0 per cent) was in mortgages, a figure that showed little change from 1999, according to Statistics Canada. However, the total amount of mortgage debt has increased dramatically, up from $453.6 billion in 1999 and $650.8 billion in 2005.

The median value of mortgages on our principal homes was $145,000 in 2012, up 66.5 per cent from 1999 and 41.6 per cent from 2005. When looking at other real estate, the median value of the debt was $140,000 in 2012, up 78.1 per cent from 1999 and 36.7 per cent from 2005.

In 2012, credit line debt amounted to $144.9 billion, up from $33.2 billion in 1999 and $77.5 billion in 2005. One-quarter of family units had lines of credit in 2012, the same as in 2005, but up from 15.4 per cent in 1999. The median line of credit debt was $15,000 in 2012, up from $6,600 in 1999 and $10,200 in 2005.

About 40 per cent of Canadian family units carried an outstanding balance on their credit cards in 2012, virtually unchanged from 1999 and 2005. The median amount was $3,000 in 2012, up 25 per cent from 1999 and about 11 per cent from 2005.

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