The return of rising interest rates is leaving Canadians anxious as they come to grips with the reality of historically high consumer debt.
Nearly half of Canadians are now concerned about repaying their debts, while four in 10 say that further rate increases may leave them "in financial trouble," according to a poll released Monday morning by insolvency firm MNP Ltd. In September, Canadian households' credit-market-debt-to-disposable-income ratio hit 167.8 per cent, the latest in a string of national indebtedness records.
Stephen Poloz will reveal the Bank of Canada's latest interest rate announcement and monetary policy report Wednesday, and after two 0.25-per-cent increases already this year, the prospect of another is leaving Canadians fearful. Borrowing costs are now centre stage for the many consumers who took advantage of Canada's low interest rates these past few years.
Gillian Goldblatt, a licensed insolvency trustee and manager with msi Spergel Inc. in Toronto, says rate increases means some of her clients are no longer able to afford their lifestyles. "You can live in a bubble for a while until some event snaps you out of it," she said Monday. "That's when we have people come to see us."
MNP's survey found millennials are the most affected by rate increases: 40 per cent say they already feel the effects, just more than half say they're worried about being able to repay their debts and 38 per cent say rising rates could send them towards bankruptcy. The bankruptcy figure for millennials is 10 percentage points more than the average of all age cohorts.
Ms. Goldblatt said she's seen an influx of millennials approach her firm. With interest rates rising, she said they now realize that their spending habits, encouraged by easy credit and tap-and-go technology, do not align well with the financial sacrifices needed to start families and to break into the housing market. Among the various structural struggles faced by millennials, "a lot of it comes down to a lack of education," she said, suggesting that public schools hardly include enough material on financial literacy in curriculums. The effects of that, she continued, are now revealing themselves in reality.
Other consequences of high consumer debt are beginning to trickle throughout Canadian society, too. A separate report this month from HSBC Securities (Canada) Inc.'s chief economist David Watt – titled Cometh the hangover – fired a similar warning shot, saying "complacency" toward consumer debt could damage economic growth. "We are concerned about how smoothly household deleveraging from record debt levels will evolve alongside attempts by policy makers and regulators to manage frothy housing markets in key regions," Mr. Watt wrote. "The potential for an accident to occur is elevated."
Earlier this month, the Bank of Nova Scotia revealed a similarly foreboding forecast for Canadians looking to get into the housing market: Even if home prices remain relatively stable, average mortgage carrying costs for new buyers could rise by about 8 per cent next year and another 4 per cent in 2019. That would "easily" outpace the bank's projected average annual per-capita household income growth of 2.5 per cent, chief economist Jean-François Perrault wrote in an Oct. 5 report.
MNP revealed its findings Monday as part of its Consumer Debt Index, conducted by Ipsos, which surveyed 2,005 Canadian adults between Sept. 18 and 21. It found that 42 per cent of consumers aren't confident they'll be able to cover all living and family expenses in the next year without taking on more debt. One in three respondents said they're already feeling the heat from rate increases this year, and seven in 10 said they will now be more careful with how they spend money.
The insolvency firm also found that since its last survey was conducted in June, the average Canadian now has $149 less each month after paying bills and obligations. And while respondents were more confident than during the last survey about being able to take on a one-point interest-rate increase, their confidence fell significantly when asked specifically about a $130-a-month increase in interest payments.