Looking back at 2013, a few headlines stood out: the death of Nelson Mandela, the Boston Marathon bombing, the Lac Mégantic tragedy, catastrophic floods in Alberta, and, sadly, anything related to Miley Cyrus … Financially, too, there were highlights.
Record debt levels
Just when we thought it couldn’t get any worse, household debt hit a new high. The Canadian debt-to-income ratio recently climbed to 163.7 percent. This means that Canadians owe nearly $1.64 for every $1 in disposable income they earn this year. That’s just depressing.
Aside from the astounding figures representing amounts owed, another reason this debt load is of concern: Most of it is mortgage debt. And our current debt-to-income ratio is now higher than levels seen in the U.S. and Britain about five years ago. What followed was an increased rate of defaults in the subprime mortgage market, contributing to the 2008 financial crisis and global Great Recession.
Low interest rates continue to fuel Canadians’ spending, but financial experts maintain that they won’t stay low forever. When they start climbing, people are going to find themselves in an even deeper hole.
That’s why it’s important to chip away at debt pronto, starting by creating a budget, says Jeffery Schwartz, executive director of Consolidated Credit Counseling Services of Canada, Inc. That budget should include a certain amount every month that’s allotted to debt repayment.
“Make debt repayment invisible — that is, make payments automatic by setting up an automatic withdrawal from each paycheque,” Schwartz says, adding that the old trick of freezing plastic cards is a good one. “Don’t use credit,” he says. “It’s impossible to make a dent in your debt if you continue to pile on more.”
With mortgage rates starting to rise, housing sales keep rising, even in markets that are deemed overvalued.
Sales in Greater Vancouver, for instance, climbed nearly 38 per cent in November compared to the same time last year. Residential sales in Toronto during the first two weeks of December, meanwhile, were 18 per cent higher than the same period in 2012.
The Bank of Canada warned recently that if the housing market gets much hotter, there’s an increased risk of a correction in house prices down the road.
“In Canada, the high level of household debt and imbalances in the housing sector are the most significant domestic vulnerabilities to address,” the central bank stated in its semi-annual Financial System Review.
For those wanting to get into the real-estate market for the first time, financial advisers suggest putting aside a certain amount of savings every month via automatic withdrawal. Be sure to determine exactly how much house you can actually afford before taking the plunge. And look at ways to pay down the mortgage faster, through accelerated payments, for example.
Of course, with housing prices being what they are, you may want to consider moving to places like Moncton or Lethbridge that are among the cheapest cities in the country to own a home.
Talk of CPP reform
Some people think we need to beef up the Canada Pension Plan in order for so many Canadians to be able to retire. Others warn that mandatory hikes will hurt businesses, and the overall economy, by costing employers more.
As it currently stands, there will be no government-enforced enrichment to the program. For approval, it requires the support of seven provinces representing two thirds of the population. There are six so far: Ontario, PEI, Nova Scotia, Newfoundland, Manitoba, and Quebec.
In the meantime, Canadians need to think about how they’ll spend their so-called golden years without going broke. As it stands now, more than half of retired Canadians who report they’ve been unable to realize their retirement plans say it’s because they have less money to live on than expected. Forty per cent say they hadn’t prepared adequately or at all. Many opt for so-called “encore” careers to bring in much-needed extra cash.
One way to boost later-years’ savings, of course, is to contribute to a Registered Retirement Savings Plan (RRSP). Canadians don’t max out their contributions, leaving more than $600 billion of unused RRSP contribution room. Those automatic withdrawals every pay cheque are an easy way to put money aside regularly.