Canadians pinch pennies, pound debt

It seems Canadians have taken Ottawa’s warning on debt to heart. They are getting the message that their debt levels are unsustainable and are holding off making big financial commitments such as buying a car, a house and electronics, according to a survey by PwC.

“Across the board, we are seeing a new desire by Canadians to cut back on major expenditures from our survey a year ago,” said John MacKinlay, leader of PwC’s national financial services consulting and deals practice. “Clearly, they are heeding the various warnings from the federal government and the Bank of Canada.”

The top reasons cited for wanting to reduce debt were fear of not being able to pay off debt (47%) and the economy (46%), followed by uncertainty in the financial markets (33%).

On a brighter note, the study found Canadians feel a level of optimism about their job security and incomes. Overall, 76% of respondents feel their jobs are secure, while 21% believe their jobs are “at risk.”

“In general terms, Canadians are relatively comfortable with the future of the economy and their job prospects,” said MacKinlay. “They are also comfortable with their level of debt because of the equity created by high housing prices, the availability of funds from their banks, and low carrying costs due to the prolonged low interest rates.”

However, MacKinlay warns that because Canada has largely been spared the economic malaise of the U.S. and Europe, many Canadians may not fully appreciate the tenuous nature of the global recovery, creating a false sense of security.

“Continued improvement in the economy will ultimately result in higher interest rates, putting pressure on borrowers,” he said. “The only scenario where interest rates remain at current levels is in the event of a weaker economy, which creates employment challenges for borrowers.”

Acknowledging this dilemma and in response to Canada’s rising real estate markets, the Office of the Superintendent of Financial Institutions (OSFI) has issued new guidelines on mortgages and lines of credit.

“Major banks are already following the general principles and should be able to comply easily with additional requirements,” added MacKinlay.

The study revealed that of all the big purchases, Canadians are putting the brakes on automobiles (69%) first, followed by buying a bigger house (62%), new electronics (61%), entertainment expenses (53%) and a vacation (49%).

Surprisingly, 58% of all retired respondents also report carrying some debt, with 42% carrying more than $10,000.

“For banks, this is an example where it’s so important to understand the individual lifestyle needs and characteristics of certain age groups,” said Diane Kazarian, national financial services leader at PwC. “Baby boomers never lived through a major depression like their parents and they’re not afraid to borrow to make major purchases.”

The survey also found that respondents expect Canadian banks to play a bigger role in advising its customers about their debt limit and helping them stick to that limit.