Data showing that interest rates are rising faster than income provide a wake-up call to Canadian consumers who are taking on unsustainable amounts of debt.
Soaring home valuations are inflating the average Canadian’s net worth, especially in the hot real estate markets of Toronto and Vancouver, but interest rate cost increases are expected to force spending restraint going forward, warned Environics Analytics in a report Monday.
“The overarching story this year is that Canadians have never been richer but, at the same time, they’ve never felt poorer,” said Peter Miron, Environics Analytics’ senior vice-president of research and development and architect of the WealthScapes 2018 analysis.
“Real estate’s way up, liquid assets are up decently, their pensions are up, everything on their balance sheet looks great but, all of a sudden, when you look at these rising interest rates, that’s going to start pinching their cash flow and is going to leave them with less money left over at the end of the year.”
The situation isn’t dire at the moment but it could easily worsen to crisis levels — when consumers are forced to sell assets or even declare bankruptcy — within the next four years if interest rates rise as expected, Miron said.
Canadians overall paid about $9 billion more in interest charges in 2017 than they did in 2016, according to Environics Analytics statistics.
That’s about $544 more for the average Canadian household last year compared with 2016.
The average household in Vancouver incurred an additional $1,152 in interest charges in 2017, which doesn't factor in the two additional rate increases earlier this year. @EnvironicsA https://t.co/JSo47QEb2V pic.twitter.com/2qf6pNQGvh
— Mark Brown (@S_Mark_Brown) September 17, 2018
The average Canadian’s net worth rose by 8.5 per cent to almost $808,000 in 2017, but much of that wealth was tied up in assets that are difficult to cash in, such as real estate.
Meanwhile, average household debt climbed by 4.5 per cent in 2017 while the average interest-expense-to-income ratio rose 40 basis points to 6.4 per cent, the first increase in a decade, the report says.
Household debt has been identified as a key vulnerability for the financial system by the Bank of Canada, which has raised its trend-setting interest rate four times since mid-2017.
Interest rates are far lower now than in the early 1980s, when mortgage rates peaked at more than 20 per cent, but the danger is just as real because houses are worth much more now, said Scott Hannah, president of the Credit Counselling Society.
“If you had a mortgage of $150,000 and the rates went up a quarter per cent, you’d barely blink,” he said in an interview.
“But when your mortgage is half a million dollars or higher, it has meaning, especially when (the rates) are projected to go higher over the long term.”
Because wages aren’t rising as fast as interest rates, consumers are augmenting their income with more debt, he said, which leaves them vulnerable if interest rates rise or their income falls.
The Environics Analytics report found that Vancouver’s 17.2 per cent rise in real estate prices in 2017 led to it posting the highest growth in household net worth in Canada, up 12.7 per cent.
But Vancouver also experienced debt growth of 8.5 per cent, more than double the national average.
Toronto’s average household net worth grew by 9.5 per cent as real estate values rose 11.1 per cent in 2017. The report notes that higher debt caused average interest expenses to rise by $932 per household in 2017.