Household finances: Canadians at risk

A majority of Canadians indicate a high level of confidence in their financial positions, but real indicators show they may be at significant risk, according to a new report by CPA Canada.

An economic snapshot emerging from research conducted for Chartered Professional Accountants of Canada (CPA Canada) suggests that many Canadians do not feel threatened by today’s unsettled economy. In light of the sharp decline in oil prices since mid-2014, and other signs of a weakening economy, CPA Canada commissioned a public opinion poll of 1,500 Canadian adults in the winter of 2015 as a follow-up to a similar survey conducted in the spring of 2014.

The economic climate changed drastically, especially in early 2015, so the newer survey provided an excellent opportunity to gauge if Canadian households were viewing their financial position differently in the shifting marketplace.

ATTITUDES ABOUT HOUSEHOLD FINANCES

In the survey, an overwhelming majority, 79 per cent of respondents said they did not fall behind on debt and interest payments over the last 12 months, and 59 per cent said they were “living comfortably or doing alright financially.” Yet only 60 per cent of households with debt said they paid off a portion of their debt on a regular basis.

Nearly half of those surveyed did not feel that possible future economic deterioration could significantly impact their financial situation and their ability to handle their current level of debt. A mere 16 per cent expected a negative change in their personal financial situation because of the transforming economic outlook.

“It may be a matter of perception,” explains Kevin Dancey, FCPA, FCA, president and CEO, CPA Canada. “Factors such as lower interest rates, cheaper gas and a strengthening U.S. economy may have some people thinking things are just fine. However, no matter what happens with the economy over the coming months many households remain vulnerable because of high debt levels.”

Of course, households in some regions felt more vulnerable than others. In Alberta, 34 per cent of respondents said that their personal financial situation would be impacted by further economic downturns. This higher level of awareness makes sense given that the steep drop in oil prices has had a more direct and visible negative impact on Albertans.

Slightly more than half of Canadian working households said they did not save on a regular basis and only half of those surveyed said they maintain a special reserve fund for unexpected financial emergencies. The almost one fifth of respondents who indicate having an emergency fund said that their fund would not cover regular household expenses beyond four weeks.

HOUSEHOLD DEBT AT RECORD HIGH LEVELS

Key economic indicators reinforce the financial vulnerability of many Canadian households:

  • total household debt reached a record high of $1.82 trillion as of Q4 2014
  • the debt-to-income ratio reached an all-time high of 163 per cent in Q4 2014, meaning that for every dollar of income, Canadians carried $1.63 in debt
“Canadians should be taking steps now to build their nest eggs and improve their ability to service debt obligations in the event of future economic shocks,” says Joy Thomas, FCPA, FCMA, executive vice-president, CPA Canada. “Economic uncertainty lingers and borrowing rates will rise at some point. Canadians should be planning ahead and be prepared for what tomorrow brings.”

The CPA Canada study indicates that while Canadian households rate themselves highly in terms of financial knowledge, they are not taking action to plan for potential changes in the economy. CPA Canada believes a national discussion engaging Canadians and leading stakeholders is needed to drive meaningful behavioural change.

“We are committed to contributing to that dialogue and effort,” says Thomas, adding that CPA Canada is already playing an active role in encouraging Canadians to save more, spend less and reduce debt through its financial literacy program.

The CPA Canada Financial Literacy program has attracted more than 11,000 professional accountants from across Canada to its Community Connect program. These volunteers lead free, financially focused sessions throughout Canada to assist Canadians of all ages to gain the skills, knowledge and confidence required to make the best financial choices based on their individual circumstances.

Review complete findings, analysis and recommendations in our new report, Household Finances in Canada: Time for a Reality Check.

Highlights

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