How much personal debt is too much?

The headline reads, “A Six Figure Family Day”. It would be nice if it were good news, but it’s not. The debt of most Canadians is increasing steadily while savings rates are way down. We could be headed for a crisis.

A new report from the Vanier Institute of the Family says the average Canadian family is dealing with $100,000 in debt and owes far more than it earns. The report suggest the debt-to-income ratio is a record 150 per cent. That means for every $1,000 in after-tax income that a Canadian family earns, it owes $1,500.

The Vanier Institute report, entitled "The Current State of Canadian Family Finances," shows Canada's average debt load crossed a "psychological barrier" when it reached the six-digit mark. Many families would have much higher debt loads than the average $100,000, and many families would have lower ones as well. The figure includes mortgages, student loans, credit card debts and lines of credit. The big problem is that with historically low interest rates expected to inevitably rise, many families could be headed for a precarious situation.

Just as the debt ratio has climbed, the savings rate has slid downward. In 1990, Canadian families managed to put away $8,000, a savings rate of 13.0%. In 2010, that savings rate was down to 4.2%, averaging $2,500 per household.

Katherine Scott, the Institute’s Director of Programs, says, “Even though standard economic indicators tell us the recession is technically over, the confidence Canadian families have in their economic and financial situation is shaky. As governments at all levels craft their budgets for the coming year and look at cutting programs to reduce their deficits, they need to be mindful that the state of Canadian family finances continues to be fragile in many households.”

In many ways, it is not surprising that other data compiled by the Institute suggests 17,400 households were behind in their mortgage payments by three or more months in 2010, up by 50 per cent since the recession began. Credit card delinquencies and bankruptcy rates also remain higher than before the recession.

Here in St. Johns with the artificially inflated housing prices due to the oil and gas boom, when the economic situation shifts, many families are going to be left with huge debt loads, especially for housing that will be worth far less than they paid for it. It’s becoming common now to hear stories from Alberta where homes that sold for $350,000 are now worth half that and young couples, especially, are stuck with mortgages that will mean they’re paying for the rest of their lives.