I think it's time to admit that we are addicted to debt and that 2016 may be the year we hit rock bottom. In 2015, consumer debt once again rose to record levels. Household debt reached a record $1.89 trillion in the third quarter of 2015, and the average Canadian owed a record $1.64 for every dollar they earned.
Most of this debt was fueled by increased housing prices (particularly in Toronto and Vancouver) and corresponding increases in mortgage debt. Consumer credit grew by 2.8 per cent, and in many regards this worries me even more.
While I believe buying more house than you can afford is a recipe for disaster, consumer debt is usually the final tipping point. Anyone awash in lines of credit and credit card debt, whether at affordable rates or not, has little room left to maneuver when something bad happens.
In effect, those carrying high levels of debt are taking a big gamble. They are assuming interest rates won't rise, or at least won't do so quickly. They expect that the economy will continue to sputter along and their jobs will be safe. And perhaps most startling is that they hope the housing market will, at a minimum, remain as it is or preferably continue to rise.
I estimate that in 2015 roughly 121,500 individuals in Canada filed for insolvency. That's 121,500 Canadians that gambled that they could pay their debt, and lost.
"Based on my experience, if you are in the at-risk category, the odds are against you."
In 2014 there were 4.2 insolvencies for every 1,000 adults in Canada, and that rate will likely be only marginally higher for 2015.
In 2009, the year after the 2008 financial collapse, consumer insolvencies in Canada peaked at a rate of 5.8 per 1,000 adults. However, the magnitude of our collective debt is much worse today than it was before the last economic collapse.
The Bank of Canada recently reported that eight per cent of Canadian households have a debt-to-income ratio of more than 350 per cent of their gross income -- double the rate prior to the last financial collapse.
Today, the average Canadian is spending more than 14 per cent of their income on total debt payments and this leaves little wiggle room to weather any negative change to their financial circumstances. Given all this, I believe we can expect that the next peak in insolvencies in Canada will be much, much higher than the last.
And that peak will come, it's just a matter of when.
If you are playing with debt in 2016, you have to hope that everything remains stable -- your job, your health, your interest costs, even your relationship. However, based on my experience, if you are in the at-risk category, the odds are against you.
I'll be blogging about effective tips to deal with debt throughout 2016, including simple strategies for getting out of debt and the kind of financial mistakes to avoid this year. Here's hoping that if we can stop gambling with debt and start taking steps toward eliminating it, we can prove my fears unfounded.
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