Lost amid the year-end euphoria, after a banner 2017 for equities and forecasts for more synchronized global growth in 2018, were a few numbers indicating a potential dark side to the Goldilocks economy: Canadians planned to spend more despite having record debts.
Holiday shopping budgets in Canada were expected to rise 8% from 2016, according to a CIBC poll, to almost $650. More than four in 10 said they could neither afford their sprees nor resist the pressure to spend. More than half expected to blow their budgets.
This despite Canadians’ debt-to-income ratios hitting a new high: 171.1% in the third quarter of 2017. In anticipation of new OSFI rules for mortgage stress tests coming into effect at the start of this year, some economists predicted a last-minute rush on real estate would lead to another record in Q4.
Seniors, in particular, are having a harder time shaking debt: 58% of “senior-led families” were debt-free in 2016, according to a December StatsCan report—marginally better than in 2012, but down from 72.6% in 1999.
The good news is that most Canadians aren’t defaulting. However, high debt levels make “the economy as a whole more sensitive to higher interest rates,” Bank of Canada Governor Stephen Poloz said in a year-end speech about what keeps him up at night.
A new year is a good time to address debt with clients. You can capitalize on the unique vulnerability that results from gluttonous holiday credit card usage and the optimism that accompanies a fresh calendar.
Besides, any excuse is a good one. A Nielsen survey conducted for Manulife last fall found that almost one-quarter of Canadians are embarrassed to talk about how much debt they have. More than half said they rarely discuss it with friends or family, and nearly 40% said they didn’t know whom to consult about managing it.
The survey revealed good intentions about keeping debt in check, but also the need for help in following through. A few well-timed, open-ended questions to clients this month could lead to an overdue discussion (judgment reserved, of course—see “Some questions for clients”).
As this issue’s feature article outlines, the role of advice is changing. There is an opportunity for the generalist financial planner to reconcile investments and retirement planning with the debt albatross that clients may be keeping to themselves. Opening a new investment, or even continuing automatic deposits, may not be the best option for a client carrying a lot of debt—particularly as historically low interest rates continue to rise.
Talking about debt could also mean getting ahead of the regulators. A 2016 CSA consultation paper recommended asking about debt as part of KYC requirements, and factoring debt in when assessing suitability.
Canadians have an appetite to change their borrowing behaviour. They may just need the right nudge. No time like the new year to schedule those discussions.
Some questions for clients
- How do you feel about your holiday spending?
- When do you plan to be completely debt-free?
- What financial resolutions do you want to make this year?
- What aspects of your cash management would you like help with?