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PERSONAL DEBT INCREASE 2 0 1 — personal debt load increase

Personal debt load increase: Introduction

The great North American dream is still home-ownership. Unfortunately with soaring house prices, increasing interest rates and stricter mortgage regulations, many Canadians may not be able to realize their dreams. As a result, a new trend is starting which I describe below. The issue is whether this new behaviour, causing a personal debt load increase, is reasonable or not.

Personal debt load increase: The current housing market trend according to Statistics Canada

These factors are making it increasingly difficult for young people to break into the housing market. According to Statistics Canada, young adults today are:

More likely to live in apartments than their 1981 counterparts
Less likely to live in single-detached homes
More likely than ever to still be living at home

Personal debt load increase: Desperate times call for desperate measures

As parents you want to give your children every advantage in life, including helping them realize their dreams of home-ownership. But, what can you do? At the rate at which house prices are rising, if you wait until they reach adulthood and are ready to purchase their first home, will you be able to help them buy that house?

The old adage Desperate times call for desperate measures, seems to apply here. There is a growing number of parents who are buying houses for their children who are still school-aged; some as young as five years of age.

Personal debt load increase: The future value argument

Brad Lamb, president of Brad J. Lamb Realty & Lamb Development Corp. is one such parent. Mr. Lamb recently purchased a condo for his five-year old daughter. He purchased an 800 square foot condo in Toronto for about $450,000 which he estimates that he can rent for $2,500/month. Mr. Lamb calculates that in 15 years (when his daughter is 20) the condo will be worth in the $3 million range.

Personal debt load increase: Is it a good idea to buy a home for your school aged kids?

Clearly Mr. Lamb is in an income bracket that would allow him to purchase a $450,000 condo without putting himself into financial jeopardy. However, the same can’t be said for many parents who are buying homes for their school aged kids. Some are making an enormous financial sacrifice in the quest of guaranteeing their children home-ownership. And it’s difficult to speculate on the real estate market 10 – 15 years in the future.

Over the time you hold the property until your child can live in it. There will be fluctuations in the real estate market. You can’t be the type of person that worries every time there is a temporary decline in the market. For example, will higher interest rates lower home prices? We have been in essentially a zero interest rate environment for 10 years. The Bank of Canada is now slowly increasing interest rates. Remember that the change in value of the home only counts if you have to sell it. Until then, increases or decreases are merely on paper only.

Personal debt load increase: A different viewpoint

Susan Latremoille, director of wealth management and wealth adviser at the Latremoille Group and Richardson Group GMP in Toronto, has very strong opinions on the subject. She says, “I think it’s a crazy idea. I would not recommend my clients to do it. If parents already own their own home, they will have to pay a capital-gains tax should they decide they need to sell the additional property, as they can’t put the children’s names on the property title unless they are adults”.

What if the property is a negative cash flow rental property? It isn’t just being able to afford purchasing the property. You are going to become a landlord for many years. If the costs of holding the property are greater than the income it generates annually? That makes it a negative cash flow investment property. Can you afford to pay out that extra cash year after year? Of course the expectation is that the value of the home will continue to increase. Negative cash flow from assets is still not a winning formula for the long-term.

Personal debt load increase: You can’t put yourself at financial risk today for someone else’s future – even if that someone else is your child

Putting yourself at risk financially to buy a house for your kids is never a good idea. The best thing that you can do is get your own financial house in order. That may allow you to make an investment in your children’s’ educations and perhaps even allow you to help them buy, or at least be able to help with, that first house.

If you need help getting your financial house in order, contact Ira Smith Trustee & Receiver Inc. The results for our clients are financial peace of mind and debt free living. With one phone call you can get rid of the financial stress and feel like you’re in control again Starting Over, Starting Now.

Consumer debt Canada: Introduction

Consumer debt Canada and household debt as a percentage of income remains a hot topic these days. The high household debt as a percentage of income coupled with a Toronto housing boom and until recently a Vancouver housing boom, puts Canada’s economy at risk. Whenever we thought that Canada’s consumer debt burden had swelled to its limit, it’s reached a new high.

Consumer debt Canada: How serious is Canada’s consumer debt burden?

Consumer debt Canada has achieved a new milestone; for the first time in history, the level of debt held by Canadians has surpassed the country’s gross domestic product to 100.5% of GDP, up from 98.7% during the previous three-month period. According to Statistics Canada:

The ratio of credit market debt to disposable household income climbed to 167.6% between April and June, from 165.2% in the first quarter of the year

Total credit market debt was $1.97 trillion at the end of the second quarter

Consumer credit alone reached $585.8 billion

Mortgage debt stood at $1.29 trillion

Net worth of households increased 1.9% in the second quarter to $9.84 trillion boosted by a gain in real estate

Consumer debt Canada: What’s causing this?

Surprisingly, some feel that the debt isn’t actually the problem. Benjamin Tal, deputy chief economist at CIBC World Markets reports, “Given that interest rates are so low, this is an environment you’d expect consumer credit to rise to the sky — and it’s not. The debt-to-income ratio is not because of the debt accumulating very fast, but rather the income is not rising fast enough to compensate (borrowers).”

Consumer debt Canada: How is Canada’s economy at risk?

According to the Bank of Canada and the International Monetary Fund, it was low-interest rates that stimulated a growth in household credit. As a result many Canadians are highly indebted. Should there be any adverse shock to the economy, the Canadians who will feel it the most are those who’ve borrowed above their ability to meet mortgage payments if a real-estate crash occurred.

Consumer debt Canada: What are the four major changes?

A mortgage rate stress test implementation for approving high-ratio mortgages to all insured mortgages as of October 17, 2016 to prevent defaults in the future should the mortgage rates rise.

The government will impose new restrictions on when it will offer insurance for low-ratio mortgages as of November 30, for lowering its exposure to residential mortgages for properties worth $1-million or more.

As of this tax year new reporting rules for the primary residence capital gains exemption will come into effect. The capital gains tax is still waived, but the sale of the primary residence must be reported at tax time to the Canada Revenue Agency.

The government is launching consultations on lender risk sharing because the federal government wants to limit its financial obligations if widespread mortgage defaults begin.

Consumer debt Canada: What to do if yours is so high it is stressing you out

If you find yourself with more debt than you can afford to pay contact a professional trustee immediately. We’re experts in debt management and with immediate action and the right plan we can help you get your finances back on track Starting Over, Starting Now. Give Ira Smith Trustee & Receiver Inc. a call today.