The cost of low interest rates

Every quarter, the Bank of Canada releases its latest statistics on consumer debt, and each time, the numbers become more disturbing.

For the last few years, an ongoing national financial news story has left me increasingly uneasy.

Every quarter, the Bank of Canada releases its latest statistics on consumer debt, and each time, the numbers become more disturbing.

Put simply, Canadians now owe more money than ever before.

The latest figures show total household debt in Canada is $1.892 trillion.

That’s a lot of money. Counting it all, at the rate of $1,000 per second, would take just shy of 60 years, without allowing for any breaks.

While this amount of debt boggles my mind, another statement in the news story is much more disturbing.

The debt to income ratio in Canada is extremely high. The latest figures, released in mid December, show the average Canadian owes around $1.64 for every dollar of income.

Mortgage debt accounts for much of the total consumer debt in Canada, and here in Summerland, housing prices and the accompanying mortgages are high.

The latest assessment figures, released earlier this month, show housing prices increased by 4.58 per cent in Summerland over the past year.

A typical house, assessed at $435,000 last year, has an assessed value of $455,000 this year.

The increases are higher in Penticton at 7.93 per cent, Kelowna at 9.63 per cent and Salmon Arm at 10.23 per cent.

Housing values are increasing a lot faster than wages.

It’s easy to think of our high debt load in Canada as a constant fact of life, but it hasn’t always been like this.

In 1999, our debt to income level was much lower, with Canadians owing on average 78 cents for every dollar of income, according to Statistics Canada figures.

And in 1980, the average Canadian owed just 66 cents for every dollar of income.

It’s easy to borrow money these days and the low interest rates make it relatively easy to service a large debt. Still, the rising consumer debt load is concerning, even if it’s manageable right now.

If someone with today’s average level of debt experiences a significant health crisis, a job loss or a relationship breakdown, making the payments on a mortgage or other consumer debt becomes a huge problem.

Or, if interest rates increase, even slightly, the effects could be devastating.

Interest rates have been low for quite some time and it’s easy to think the rates will remain low forever. However, this assumption would be a mistake, possibly a very costly one.

Those who were homebuyers in the early 1980s will remember the high interest rates of those years, topping 21 per cent in September, 1981.

The debt load an average Canadian carries today would be impossible to handle at such an interest rate.

The interest rates of the early 1980s can be seen as an anomaly, the product of a time we hope will never return.

Still, even a small interest rate increase could mean a crisis situation for many borrowers.

The movie The Big Short, which is now playing, is a shocking look at the 2008 financial crisis and its causes.

The crisis happened when the U.S. housing market and credit bubble collapsed.

I saw the movie last week and it’s part of the reason I’m concerned when I read about the huge debt loads in Canada today.

How long can today’s low rates and rising home prices continue? And what repercussions will we feel when the rates begin to rise?

John Arendt is the editor of the Summerland Review.