When it comes to financial trends for 2018, the forecast is a mix of good and bad news stories.
On the plus side, the Bank of Canada is not sending any signals that it plans to significantly increase interest rates in 2018. The bank did increase the rate by .5 per cent in 2017 and may bump it again this year to control inflation, but with the Organization for Economic Cooperation and Development (OECD) forecasting economic growth in Canada to slow this year to 2.1 per cent from 3 per cent last year, any new interest rate increases are likely to be small.
All that is good news for borrowers.
On the down side, borrowers just keep digging themselves deeper into debt.
In fact, we Canadians hit a new record last year in the amount we owe compared to our disposable income.
According to Statistics Canada, by the time Canada Day rolled around in 2017, for every dollar of household disposable income we had, we owed almost $1.68 in consumer credit, mortgages and non-mortgage loans. That debt hit $1.71 by the third quarter, and in November the Organization for Economic Cooperation and Development (OECD) said household borrowing in Canada was the highest worldwide among advanced and developed countries.
Some experts say that our debt load isn’t such a big deal, depending on the circumstances. “Provided that the mortgages can be serviced, making mortgage payments is no different in principle than putting money into one’s RRSP. In both cases, an asset is being built that will prove useful in retirement,” Frederick Vettese, chief actuary of Morneau Shepel, wrote in the Financial Post in 2016.
Recipe for disaster
Others say the debt load is a recipe for disaster, especially if housing prices collapse and one of our biggest assets – our home – is suddenly worth a lot less than it once was.
Are we going to mend our ways and start slashing household debt in 2018? You should probably consider that a rhetorical question.
Since we seem to be spending so much, our savings must be pitiful, right?
In fact, the situation is more nuanced than often reported, according to data from Statistics Canada and reported in the Toronto Star last September.
The report said that while the household saving rate in this country has plummeted from 20 per cent in 1989 to less than five per cent now, two-thirds of Canadians are actually saving for their retirement, either through RRSPs or Tax Free Savings Plans.
In fact, the Star reports that the rate of retirement saving for employed people has almost doubled in recent decades.
As well, household savings don’t include contributions to the Canada Pension Plan, an important plank of retirement savings.
Finally, our growing population of elderly people means more of us are drawing on our savings than building them, a fact that could change our interpretation of how much we are saving.
Mortgages tougher to get
In an effort to ensure Canadians aren’t taking on more debt than they can handle and to control the spiraling price of homes in cities such as Toronto and Vancouver, the federal government has been tightening regulations around mortgages.
The latest toughening up, which took effect Jan. 1, sees home buyers with a down payment of more than 20 per cent now having to pass a “stress test” to prove they could still afford mortgage payments if interest rates increase by two percentage points.
Many first-time buyers are reportedly having to delay a home purchase until they can meet the new requirements, and some experts say the resulting slowdown in the housing market could depress growth of the Canadian economy.
Boomers own a lot of real estate, including their homes, cottages and investment properties.
Those assets “can cause some of the biggest problems with estate wind ups,” according to Jenna Roundell, a financial advisor with RBC Wealth Management. She says that’s because of the sentimental attachment boomers’ heirs have to the property, the fact that boomers often haven’t made estate intentions clear, or for other reasons.
For example, does your son or daughter really want the family cottage or will it be a burden?
And what about the potential tax implications when disposing of other assets?
With boomers set to inherit roughly $1 trillion from their own parents over the next 18 or so years, this trend of complicated estates could get a lot more tangled.
However, says Roundell, “Planning for this transfer and having frank conversations with beneficiaries can help alleviate all those factors for the most part.”
Millennials & financial responsibility
Earlier this year, ratehub.ca did a survey on personal financial management among millennials, those born in the 1980s to the early 2000s.
The survey found that people in that age group who live in expensive cities such as Toronto and Vancouver were more likely to be financially responsible than those living elsewhere.
For example, millennials who lived in pricey cities were likely to carry less debt and save more than their contemporaries living elsewhere.
The survey did not come to conclusions as to why there was such a striking difference, but the authors did suggest that the most likely reason was a simple one: in order to survive in an expensive city, you need to have your financial house in order.
The lesson to be taken from this trend? Millennials in less expensive cities such as Ottawa should perhaps ask themselves if they need to up their financial game.