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Canadian households $1.3 trillion in debt and still digging deeper hole: CGAs

VANCOUVER, B.C. - Canadians are getting deeper into debt and increasingly using credit to cover day-to-day living expenses, "a highly disturbing matter" that has pushed national household debt to $1.3 trillion, a new report shows.

VANCOUVER, B.C. - Canadians are getting deeper into debt and increasingly using credit to cover day-to-day living expenses, "a highly disturbing matter" that has pushed national household debt to $1.3 trillion, a new report shows.

The Certified General Accountants Association of Canada (CGA) said debt levels - mainly mortgage and consumer borrowing in a period of low interest rates - increased 6.8 per cent at the end of 2008, and have climbed another six per cent so far this year.

"It just keeps swelling," said Rock Lefebvre, vice-president of research at the CGA.

"One would have thought that the debt would not have continued to swell given that we were heading into a tough economy, and of late a recession."

While some Canadians are saving more, Lefebvre said his numbers show more people with growing debt.

The report, which includes a survey done in November, says 42 per cent of Canadians said their debt load was rising as of late last year, which is up from 35 per cent a year earlier.

"Anecdotally we keep hearing a lot of stories about people who are being more frugal ... but I would argue that, based on the numbers, we aren't seeing people tightening their belts as much as suggested," Lefebvre said, adding that debt has been rising 5.5 per cent annually over the past decade.

"The situation needs to be rectified not only to establish financial security and well being for Canadians, but also to maintain a healthy economic environment."

Rising debt is a growing problem in an economy where Canadians' incomes are being squeezed by layoffs and a deepening recession. Eventually, analysts predict, consumers will be forced to pay down their debts or curtail spending - moves that could affect the retail economy and slow down the recovery.

The recent trend towards rising consumer bankruptcies could also intensify, the experts say, especially if interest rates rise and debt-service costs on mortgages and consumer loans increase to unmanageable levels.

In the United States, tightfisted consumers facing more restrictive credit conditions have been saving higher amounts of their pay for the last year or so and have reduced their retail spending to repay rising debt loads.

Of the $1.3 trillion in debt weighing down Canadians, Lefebvre said $900 million is from mortgages - reflecting the rising costs of housing in many parts of the country - and $400 million from general consumer debt.

Lefebvre said mortgage debt levels decreased slightly in 2008, while consumer debt rose.

"People no longer see a problem with holding debt. Some of us might remember when our parents would be embarrassed to owe money on a vehicle or a sofa, whereas that is the norm today," he said.

"It becomes an increasingly worrisome trend when we are buying things with money we haven't earned yet."

The report, called "Where Has the Money Gone: The State of Canadian Household Debt in a Stumbling Economy," says low-income Canadians are some of those being hit hardest.

"Those with annual household income under $35,000, households with children and retirees were much more likely to acknowledge that their debt had noticeably increased. The proportion of individuals who think they have too much debt and that have trouble managing debt increased as well," it states.

The report, based on a survey done in November, also says 85 per cent of households had outstanding debt on a credit card.

What's more, 21 per cent of Canadians in debt said they could no longer manage their debt load.

"We judge the current level of indebtedness of Canadian households as a highly disturbing matter," the report says.

Forty-nine per cent of families with children under 18 said their debt had increased in the past three years, according to the online survey of 2,014 households, which claims a 95 per cent likelihood of being accurate within 2.2 percentage points.

Lines of credit and credit cards account for the largest proportion of consumer debt, and the report says the escalation of debt "is primarily caused by consumption motives rather than asset accumulation."

Tuesday's report also says one in four Canadians interviewed would not be able to handle an unforeseen expense of $5,000, and one in 10 would have trouble with an unforeseen cost of $500.

Laurie Campbell, executive director of Credit Canada, a non-profit credit counselling organization, finds those statistics scary.

"If that is what it comes down to, that 10 per cent of us would even struggle with something as minimal as a $500 unexpected expense, then it tells you how precarious this situation is. How many Canadians are actually living on the edge," Campbell said.

She believes the problem is larger than the current recession, especially given that the report was released in November and the economy has worsened since.

"Canadian have been living far beyond their means for so many years that the savings rate has plummeted," Campbell said.

"The fallout is that Canadians have been relying on credit to such a large degree that they have very little room to manoeuvre."

Campbell thinks the result will be a longer recession than in previous years, because Canadians can't spend their way out of it as easily as in the past.

"With savings rates being at an all-time low and debt being at dangerously high levels, Canadians cannot do that this time around," Campbell said.

"The result is a prolonged recession."

The report also shows 43 per cent of Canadians don't feel confident their financial situation at retirement will be adequate.

"Younger (and not older) respondents were more likely to feel insecure about their retirement," the report states.

The report comes on the heels of Bank of Canada data released Friday showing lending by the chartered banks has flagged in the weak economy - except in consumer credit, which continues to swell.

Personal lines of credit expanded to a new high of $181 billion outstanding in April, an increase of 6.2 per cent year-to-date, and up 20.4 per cent from a year earlier. This type of debt has bloated from $100 billion five years ago and less than $50 billion at the start of the decade.

Personal loans from banks totalled $48.5 billion, up 8.1 per cent from a year earlier, and bank credit-card receivables were up 8.9 per cent at $51.5 billion.

The number of mortgages in arrears grew to 0.39 per cent or 15,064 as of March, according to statistics on the Canadian Bankers Association website.

That compares to 0.27 per cent or 10,438 for the same month last year.

 
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