Canadian household debt levels have long been a concern for the Bank of Canada. They should be a priority for financial advisors too.
The central bank has been worried about household indebtedness for some time. Yet, amid growing household wealth and a robust job market, borrowing has yet to cause real problems for the economy.
However, signs of trouble are multiplying. Consumer bankruptcies and debt restructurings are on the rise. And there are other symptoms of stress lurking in Canadians’ household budgets.
According to a new report from National Bank Financial Ltd. (NBF), the cost of debt servicing for Canadian households reached record levels in the second quarter of this year, with interest and principal repayments on household debt rising to 14.9% of disposable income – which tops levels last seen during the global financial crisis.
Moreover, despite continuing low interest rates – borrowing declined in Q2, NBF says – interest payments accounted for 7.5% of disposable income during the quarter, outpacing principal repayments, which accounted for 7.4%.
Many more households are highly vulnerable to a negative shock, such as a deterioration in the labour market or rising interest rates. High debt burdens also weaken household consumption, which is a key economic driver, and reduce Canadians’ capacity for saving and investment.
Investor Economics Inc. recently reported that Canadians’ financial wealth declined in 2018 for the first time since the financial crisis. The superficial implication of that for the financial services industry should be obvious: the overall investment pie is shrinking.
More important, increasingly precarious household finances suggest lack of sound financial decision-making and, by implication, a shortage of sensible financial advice.
For many advisors, there’s no incentive to recommend that a client tackle their debts instead of buying an investment product. Yet, debt clearly is an area in which many Canadians need assistance.
There may be no short-term payoff to confronting clients’ debts. But advisors who can help clients shore up their balance sheets will be better positioned to be rewarded in the long run.