# "Current State of Canadian Family Finances"



## MoneyGal (Apr 24, 2009)

The Vanier Institute of the Family releases a research report on family finances each year. Here's the 2009 edition, released today...

I haven't read it yet, but the press release notes:

In releasing its 11th annual assessment on The Current State of Canadian Family Finances, Clarence Lochhead, the Institute’s Executive Director says “The effects of this recession will test the resilience of many Canadian families. While the stock market may be up, the improvement for families will lag behind in terms of employment, increases in income, and a return of net worth.”

The Institute’s report indicates many families walk a financial high wire, citing research in which 59% of respondents say they would be in trouble if their paycheque was delayed by even a week. The two-income family is an established reality in Canada, as fully 70% of women with young children and a working spouse are working outside the home. 

The study stresses that personal debt is an increasing problem at the kitchen table, with a 50% increase in mortgages running 90 days or more in arrears in 2009 compared to a year before. The number of credit card holders who were behind at least three months in their payments was up 40% during the same period. 

Roger Sauvé of People Patterns Consulting, who authored the report for the Vanier Institute, also flags growing concern over a “housing bubble.” He raises the point that over the past 20 years, house prices have averaged 3.7 times household earnings. Now it is 5 times earnings, with real estate now providing 48% of the net worth of Canadian households, the highest it has been in 20 years. 

Sauvé warns that conditions are in place for a correction in house prices. When and by how much is the difficult question. This could be hard on many families, especially recent first-time buyers, who took advantage of record low interest rates to buy a house, and who may not fully realize what an increase in mortgage rates by several per cent will mean for their monthly payments.


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## Xander (Apr 3, 2009)

The housing bubble is real and it will most likely burst. 

I'm not a fan of gov't over regulation or intervention but they never should have allowed 40 yr ammortization, 0% down, etc....

The government is now tightening the mortage rules but they are closing the doors of the barn long after the horse is out. The fuse has been lit. People, especially young families, who bought the most house they could afford at record low rates in order to 'keep up with the Joneses' are in some serious trouble.

The banks, bankers and mortgage brokers share a good chunk of the blame as well. CDIC insurance eliminated their risk. They had no incentive to advocate a lower mortgage amount to a higher risk demographic. Why explain to a young couple that while they may be able to afford a $300,000 or$400,000 or $500,000 house under the current conditions they WILL NOT be able to do so when (not if) the rates go up? In most cases these people work on quota or commision bases. They'll push for the most allowed.

I remember 6 yrs ago when my wife and I were looking for a mortgage the women was dumbfounded. She actually seemed to be offended that we only wanted a $250,000 mortage when we were pre-approved for as much as $375,000. The banks will not suffer if there is a mass default. The Canadian tax payer will foot the bill.

In the end though, it is up to each person to educate themselves enough to avoid putting themselves such a predicament. In regards to personal responsibility, it is a dire situation. A mortgage is for most, the single largest transaction a person will ever conduct. A decision that these people will live with for 25, 35 or even 40 years. A decision that will cost them, again in most cases, over double the actual purchase amount. Yet even with so much at stake most people have no idea what they are getting into or take the time to find out.


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## Square Root (Jan 30, 2010)

*Don't Blame the "Banks"*

In my experience the Banks are generally pretty responsible in these matters. The CEO's went as far as recommending these type of changes to the rules. Mortgage and real estate brokers not so much. Agree that CMHC and our federal Gov't (ie taxpayers) will be left holding the biggest part of the bag.


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## brad (May 22, 2009)

Ultimately I think this underscores the need for basic personal finance courses to be added to high school curricula. Somewhere along the way, "home economics" turned into cooking and sewing, with no economics in sight. The problem is that people learn about personal financial management through hearsay and following the examples of their ill-advised friends, and bad financial practices spread like a virus throughout the population. The best vaccination is education.


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## MoneyGal (Apr 24, 2009)

Nice medical analogy, Brad. 

I once (when I was an advisor) met a couple who proudly told me they had a new car, but no car payment. I was pretty impressed, because they had a brand-new, fully-loaded $35,000 SUV...up until they told me they had no car payment _because they'd re-mortgaged and used the equity in their house to buy the car_...


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## MoneyGal (Apr 24, 2009)

Coming back to say: I am probably too cynical to think that basic consumer and financial education will do the trick. I think that it might work for a kid who is already curious and rational about money. 

I think the bigger problem is entitlement (and now I sound OLLLLLLLD). I am thinking of the couple that I asked about in my thread about interest rate differentials -- this couple is lacking in basic financial education, yes; but the bigger issue is that whether they understood the mechanics of what they were doing or not, they honestly believed they were entitled to a lifestyle they could not, ultimately, afford.


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## HaroldCrump (Jun 10, 2009)

MoneyGal said:


> I once (when I was an advisor) met a couple who proudly told me they had a new car, but no car payment. I was pretty impressed, because they had a brand-new, fully-loaded $35,000 SUV...up until they told me they had no car payment _because they'd re-mortgaged and used the equity in their house to buy the car_...


I understand the point you are trying to make, however, if this family _needed_ a new car, they did the right thing in taking out a home equity loan rather than a car loan since the interest rates for car loans are atrocious.
A HELOC is usually around prime (plus or minus some) whereas car loans are in the teens.


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## Dana (Nov 17, 2009)

MoneyGal said:


> ...but the bigger issue is that whether they understood the mechanics of what they were doing or not, they honestly believed they were entitled to a lifestyle they could not, ultimately, afford.


Well put! That sums up the underlying problem.


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## CanadianCapitalist (Mar 31, 2009)

brad said:


> Ultimately I think this underscores the need for basic personal finance courses to be added to high school curricula. Somewhere along the way, "home economics" turned into cooking and sewing, with no economics in sight. The problem is that people learn about personal financial management through hearsay and following the examples of their ill-advised friends, and bad financial practices spread like a virus throughout the population. The best vaccination is education.


While I think personal finance courses are a great idea, I also believe that widespread financial education will only result in marginal improvement. Undoubtedly, some will benefit (and that alone will make any effort worthwhile) but the improvements will be marginal due to two reasons:

1. It's not lack of awareness that is the culprit; it's lack of discipline. Just as pretty much everyone knows they have to eat right and exercise, there is hardly anyone who doesn't know that they have to spend less than they earn and put away something for a rainy day.

2. The financial industry has vast resources at its disposal. They use their resources to successfully lobby for favourable regulation. They use their advertising dollars to influence opinion or at least muddy the waters. It isn't even a fair fight really.

I sound cynical and jaded but it is human nature to live for the moment, especially when it is so easy to do so these days.


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## MoneyGal (Apr 24, 2009)

But Harold: They didn't take out a HELOC. They re-mortgaged, and added the $35,000 to their mortgage. I agree a HELOC would have been a smart move. Buying a car by remortgaging is NOT.

Editing to say that in re-reading my original post, I was not clear on this point!


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## brad (May 22, 2009)

MoneyGal said:


> I think the bigger problem is entitlement (and now I sound OLLLLLLLD).


That's a cultural issue, and one that I think can also be addressed by education--especially when you consider there are many ways to educate people, only a few of which involve standing a teacher in front of a class.


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## MoneyGal (Apr 24, 2009)

Yeah, all the little Brownies in my Brownie unit get their "managing money" badges - which involves opening a bank account, identifying a savings or spending goal, developing a budget (and a basic understanding of compound interest), and presenting their plans to the whole unit. These are seven- and eight-year-olds. 

Signed, "Cookie Owl"


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## brad (May 22, 2009)

CanadianCapitalist said:


> I sound cynical and jaded but it is human nature to live for the moment, especially when it is so easy to do so these days.


I totally agree, and while this seems an insurmountable problem I think there are analogies we can point to that show it's possible to achieve at least some progress.

For example, it is far easier and simpler to throw trash out your car window or drop it on the sidewalk than it is to carry with you to the next trash can. And this is how most people behaved in North America until the mid 1960s (and in places like Ireland until the 1990s). But you don't see it anywhere near as much today. Sure, plenty of people still litter, but they're a minority instead of a majority. 

Cigarette smoking is another example. While it's still very prevalent, especially among young people, the coolness factor of smoking remains high only among adolescents; for adults it is much more widely regarded as disgusting, a sign of weakness, or at least a bad habit that one should kick. Smoking is a behaviour that provides instant gratification on many levels, with very delayed negative consequences. 

Humans are terrible at avoiding temptations like that, because the "punishment" is meted out far in the future, whereas the "reward" comes right away. And yet the fact that smoking has declined in many societies shows that cultural evolution can at least partially overcome even some of our strongest animal instincts.


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## Dr_V (Oct 27, 2009)

It never ceases to amaze me when I hear some of these stories about people buying things that they cannot afford. (Thanks for sharing!)

I have to admit, I'd probably be a terrible financial planner. I have _very little_ patience for spendthrifts who fail to plan for the future, and are then caught "unawares" by their self-made financial disasters.

I see evidence of this every day on my drive to work -- I cannot count the number of Lexuses, Infinities, and Mercedes which pass me in my 11-year-old Saturn. (I can't believe that there are _that_ many more people who earn more than me!) I see it with family members who dish out on expensive renovations (when they're _unemployed_, for goodness' sake). I see it in friends who splurge on trips, but then tell me that they're _almost done making payments on their living room couch_.

It's remarkable.


K.


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## MoneyGal (Apr 24, 2009)

I recently was reading some financial advice which suggested that in order to save money, you should "try" to bring your lunch to work "at least twice a week." 

(No disrespect to people who don't pack a lunch. I am sure I have other "splurges" that you don't. And besides, I think how much you spend on lunch or any other relatively trivial thing - like razor blades  - is unimportant if you are hitting your savings goals. But still!!)


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## Dr_V (Oct 27, 2009)

MoneyGal said:


> I recently was reading some financial advice which suggested that in order to save money, you should "try" to bring your lunch to work "at least twice a week."


hehe. I bring my lunch every day (hurray for leftovers!), but may eat out with coworkers once every couple weeks. On the other hand, I have some coworkers who eat out every day...

I would say that, when I lived in California (Mountain View -- aka Silicon Valley -- to be precise), eating out was more affordable than here in Canada due to increased lunch-time competition which helped to drive costs down. Though, the costs could certainly add up.


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## bean438 (Jul 18, 2009)

MoneyGal said:


> But Harold: They didn't take out a HELOC. They re-mortgaged, and added the $35,000 to their mortgage. I agree a HELOC would have been a smart move. Buying a car by remortgaging is NOT.
> 
> Editing to say that in re-reading my original post, I was not clear on this point!


I am setting up a smaller HELOC within my BMO homeline for future car loans should I need one. You can pay interest only, OR if used properly you can choose to pay it off monthly over 1, 2, 4, 5 years , or whatever you want. If you have the equity in your home to secure a lower rate, then why not?


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## MoneyGal (Apr 24, 2009)

Concur. But setting up a HELOC is different from buying a rapidly-depreciating asset (a new car) using home equity by adding to your mortgage. 

If the question is "how can I borrow money cheaply?" then clearly a HELOC is a good answer. However, what is actual cost of borrowing the money in the way that I've described for this couple? Keep in mind that they increased their amortization period to keep their monthly payments the same. 

Assuming their original amortization period was 25 years and their mortgage amount was $200K at 5%, they would pay a total of $349K to retire the mortgage, of which $149K is interest. 

Now assuming they increase their mortgage amount by $35K (the amount of the car) and increase their amortization period to 35 years (to keep the monthly payments the same), all of a sudden their total payments swell to $495K, of which $260K is interest. 

The difference in interest between these two scenarios is $111K. This is the "real" cost of a $35K car purchased in this way.


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## bean438 (Jul 18, 2009)

Moneygal what you describe is exactly what went wrong in the US.


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## Berubeland (Sep 6, 2009)

I think there is a fundamental problem with understanding of money and it's uses. 

I think of each dollar as a soldier in my army. I send my army out to solve problems and bring back recruits. Therefore I resent using my forces in battles that can only result in attrition such as buying a new car or TV. I do not have a big enough army to lose soldiers. 

The other lie we are told about money is that it is somehow linked to happiness which it is not. Money is great for certain things like paying the electric bill and buying food but really poor for other things such as love and relationships and spirituality which are also part of a whole person.


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## OptsyEagle (Nov 29, 2009)

HaroldCrump said:


> I understand the point you are trying to make, however, if this family _needed_ a new car, they did the right thing in taking out a home equity loan rather than a car loan since the interest rates for car loans are atrocious.
> A HELOC is usually around prime (plus or minus some) whereas car loans are in the teens.


I agree with both you and Moneygal. Harold, your point is clear. HELOC have a cheaper interest rate. The point MG is trying to make and I agree whole heartedly is that a lot of people that put expenditures on thier mortgage or HELOC have very little plans to pay them off or do it in any fashion before the purchased items depreciates to something worth less than zero. They then hear people and bankers saying, you are doing the right thing, and they mistake the advice they received on financing and assume it is advice that goes to the purchase. And it usually is not. The right thing to do in many cases is to avoid the purchase completely.


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## OptsyEagle (Nov 29, 2009)

CanadianCapitalist said:


> While I think personal finance courses are a great idea, I also believe that widespread financial education will only result in marginal improvement. Undoubtedly, some will benefit (and that alone will make any effort worthwhile) but the improvements will be marginal due to two reasons:
> 
> 1. It's not lack of awareness that is the culprit; it's lack of discipline.


That is exactly it. 

Most people who spend more than they make, do not need a lesson in financial planning to figure this out. If they cared to know, their grade 6 math skills could have lead them to this conclusion. Since they decided not to use them, it tells me they did not really want to know that they really can't have a house as nice as their friends have, own a TV, at least as big as their brother in laws, and own a car like the one all the girls are looking at in the commercials.


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## Racer (Feb 3, 2010)

Great thread. I like the point about the misconception that money = happiness. 

I wonder if it's accurate to think of people as being frivolous. I mean, it's not as though we are living in a vaccuum. Every day it seems that I see veritable chorus lines of cheerleaders, inviting me to take on debt and consume, consume, consume. 

Financing, borrowing, instantaneous withdrawals, debit and credit purchases, and the like surround us _everywhere_. I for one find it very hard to stay grounded and live by the values that I want to live by. 

When pressed, I think that most people would say that one should only buy something when one can afford it. The people who have commented on this thread would define "afford" as the moment when you have saved enough money ahead of time. The other, more hapless and less disciplined but still well-meaning folks, would say that "afford" means that you can pay it off at some point. And then they, or at least some of them, get tripped up.

It's not an excuse, of course. But it is an explanation.


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## brad (May 22, 2009)

Racer said:


> The other, more hapless and less disciplined but still well-meaning folks, would say that "afford" means that you can pay it off at some point.


Honestly I think it mostly boils down to the fact that 90% of people are sheep. They do what they see others doing, and follow the pack. But it also boils down to the issue that Canadian Capitalist brought up in this thread: people want instant gratification, and prefer to have what they want today than to wait until tomorrow. I'm not sure the question of "can I afford it?" enters the equation. It's more "is there enough room left on my credit card to pay for that?"


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## Wealthy1Day (Aug 30, 2009)

Too often, there is enough room left on people's credit cards. I think credit limits are increased so easily that it perpetuates the problem.


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## Racer (Feb 3, 2010)

brad said:


> Honestly I think it mostly boils down to the fact that 90% of people are sheep. They do what they see others doing, and follow the pack. But it also boils down to the issue that Canadian Capitalist brought up in this thread: people want instant gratification, and prefer to have what they want today than to wait until tomorrow. I'm not sure the question of "can I afford it?" enters the equation. It's more "is there enough room left on my credit card to pay for that?"


I think there's room for us both to be "right" here. Yes, a lot of people behave like sheep. And yes, a lot of corporations have done their damnedest to act as shepherds. 

I don't know a lot of people with maxed out credit cards, personally. But I do know a lot of people who carry balances on their cards because they underestimate how easy it will be to pay it back. In my experience, the people with very low income are often great at avoiding credit card balances -- it's the middle-lower class and the middle class people I know that foolishly lead a leased lifestyle, carry balances, etc.


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## houska (Feb 6, 2010)

OptsyEagle said:


> Most people who spend more than they make, do not need a lesson in financial planning to figure this out. If they cared to know, their grade 6 math skills could have lead them to this conclusion. Since they decided not to use them, it tells me they did not really want to know that they really can't have a house as nice as their friends have, own a TV, at least as big as their brother in laws, and own a car like the one all the girls are looking at in the commercials.


Not sure I agree with this. Education not only adds actual skills/knowledge, it highlights the relevance of this knowledge and changes cultural values over time.

Someone used the littering example. People throwing junk out the car window in the 60s didn't need a lesson to know that litter by the side of the road didn't look nice. But education and changing cultural attitudes have worked together to build awareness of the total costs (financial, environmental, aesthetic...) of littering, and the education of others has made it more likely the friends of a weak-willed would-be litterer will exert peer pressure.

Same with Moneygal's example of the car mortgage refinancers. I'm sure they don't need lessons to know that buying an expensive car will cost them somewhere somehow. But I'm also sure they don't know enough finance to think through the calculation of the increased total mortgage interest charges and about asset-liability matching. More education about the costs of debt for young people would bring greater awareness - and help us to the point where couples like this could only do what they did shamefacedly rather than proudly.


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## Oldroe (Sep 18, 2009)

Can't see how early ed. will hurt.

I see the other side were people are so cheap so thrifty that having money is just a waste. Then they spend every waking moment worry about there money.

All our bills are payed and the investments made then we eat out take trips blow every cent left. Better to have some fun now than later.


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## CuriousReader (Apr 3, 2009)

HaroldCrump said:


> if this family _needed_ a new car,


I am pretty sure no family will _need_ a fully loaded SUV at 35k - esp one that they cannot afford. Surely they dont _need_ that leather seats, moonroof, and voice-activated GPS system.

Which lead to the underlying problem:



MoneyGal said:


> they honestly believed they were entitled to a lifestyle they could not, ultimately, afford.


*Many* people fall into this category. I am pretty sure if you are in this forum, you are not in that category, but sadly, most Canadians are very likely to be in such position.


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## MoneyGal (Apr 24, 2009)

Well, another part of the puzzle is cultural. I am willing to be an outlier in my peer group, and that's part of what it takes - to drive my 1999 station wagon on a street filled with much newer vehicles. You have to be willing to be seen as "odd" or even "poor" when you don't make decisions which maximize current consumption. At least on my street!


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## CuriousReader (Apr 3, 2009)

MoneyGal said:


> Well, another part of the puzzle is cultural. I am willing to be an outlier in my peer group, and that's part of what it takes - to drive my 1999 station wagon on a street filled with much newer vehicles. You have to be willing to be seen as "odd" or even "poor" when you don't make decisions which maximize current consumption. At least on my street!


Yes, this is definitely a big thing.
Tons of people feel like they have the "need" to be up to the trend and dont want to be looked down upon based on their possession of the latest/greatest technology, gadgets, cars, shoes, clothes, etc.


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