Friday, February 15, 2013

Canada's Indebted Seniors

A recent survey by Ipsos Reid for TD Economics gives us an interesting insight into Canadian household debt.  While overall Canadian household debt grew at its slowest pace since 2003, debt accumulation varied greatly across both regions and age groups.  While we're all told, pretty much from birth, that we need to save for our sunset years, it appears that Canadians over the age of 65 are throwing caution to the wind.

To open, here is a graph showing the growth rate in household indebtedness for all age groups and all regions of Canada since 2002:

The average annual percentage change in average debt per household between 2002 and 2010 for all Canadian households rose by 5.7 percent with Canadians aged 65 and older seeing their average annual percentage debt growth over that period rise by a whopping 9.6 percent.

Here is a graph showing that, while the growth in debt load has moderated, the level of household debt-to income is rising into new territory particularly when measured using Statistics Canada data which uses disposable income to calculate the debt-to-income ratio:

According to Ipsos Reid calculations which uses the average value of households that have debt and excludes those which do not and compares it to pre-tax income, indebted Canadian households have a debt-to-income ratio of 135.7 percent.  

Now, let's drill into the data and look at household debt growth since 2010 across all age groups from 25 years of age and up:

Again, according to Ipsos Reid calculations, household debt-to-income ratios range from 146.7 percent for Canadians aged 18 to 24 to 168.5 percent for Canadians aged 25 to 44 to 116.2 percent for Canadians aged 45 to 64.  By way of comparison, the debt-to income ratio for households 65 years and older is still a rather lofty and uncomfortable 86.3 percent.

On average, households in the 65 years and older group accumulated $6,236 in new debt during the year, a 15.1 percent increase.  The increase in debt was used to fund consumer spending for the most part; used to purchase either discretionary or non-discretionary items.  Average debt for this age group reached $47,549 but, on the upside, is a fraction of the debt loads carried by those between the ages of 25 and 64 which ranges from $92,819 to $137,259.  Unfortunately, the increase in debt for Canada's seniors was accompanied by a decrease in the average value of household assets which dropped by 1.1 percent to $398,630.  The vast majority of these assets consist of real estate.  Despite the fact that many of these older Canadians are living on fixed incomes, their average mortgage indebtedness is $104,196, up 8.6 percent on a year-over-year basis.  Mortgage debt for younger Canadians ranges from $136,013 to $184,805, not a great deal more considering that they have not had decades to increase the equity in their homes.

Interestingly, the average level of household debt for Canadians over the age of 65 varies greatly by region as shown here:

Senior Canadians in Atlantic Canada, Manitoba and Saskatchewan and British Columbia actually reduced their level of indebtedness on a year-over-year basis by as much as 10.8 percent (Manitoba and Saskatchewan) whereas those in Quebec, Ontario and Alberta increased their debt levels between 2011 and 2012 by as much as 38.9 percent (Quebec) and 21.7 percent (Ontario).

With senior Canadians holding relatively large mortgages even when compared to their much younger counterparts, they are particularly vulnerable to a readjustment in the value of their homes.  As well, with only 38.8 percent of Canadian employees covered by a registered pension plan in 2010, the future could be very difficult for Canadians that are in their later years.

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