So despite what financial planners have promised, you can’t have it both ways. The reality is, the safer the investment, the less money you’re likely to be able to stash away. And that means many Canadians will have to downsize their retirement expectations if they want to be able to sleep at night and not fear another gut-wrenching crash.
They might start by getting their personal balance sheet in order. Canadians are clearly living beyond their means, and the situation, surprisingly, is getting worse. According to a report earlier this year from the Certified General Accountants Association of Canada, consumer debt reached a record $1.3 trillion last year. Canadian households now owe $1.36 for every dollar of disposable income, up from 97 cents of debt for every dollar of income in 2000.
Scott Hannah, president of the Vancouver-based Credit Counselling Society, which helps consumers who are drowning in debt, says he’s seen little evidence households have learned anything from the financial crisis. Nor have they paid much heed to what happened in the U.S., where plunging house prices have left millions of households underwater on their mortgages. He points to the resurgence of the housing market in Canada as a worrying sign. Canadians are once again taking out massive mortgages at record-low rates. When it comes time to refinance, their monthly payments could easily skyrocket.
It’s not all that different from what happened in America’s subprime housing market. Only instead of low mortgage rates being a product of financial alchemy on the part of lenders, rates are low due to the recession and the massive intervention by central banks. Just last month, Bank of Canada governor Mark Carney warned Canadians not to overextend themselves with large mortgages bought using “exceptionally low” interest rates. Here’s why he and others are concerned. The monthly payment on a $250,000 mortgage taken out when five-year mortgage rates were four per cent would jump from $1,319 to nearly $2,000 if rates rose to just eight per cent, where they were earlier this decade.
“People haven’t learned that the difference between being financially stable and being in financial chaos is a pretty fine line,” says Hannah. “Quite frankly, the average person who hasn’t managed their finances effectively would have been better off, in the long term, if our so-called recession hadn’t been over so quick. Those lessons that my grandparents learned in the dirty thirties stayed with them for life.”
In the absence of learning life lessons, some argue that investors and consumers need more formal education in the ways of money. Governments are beginning to step up on that front. In June, Finance Minister Jim Flaherty launched a task force on financial literacy. Earlier this month Ontario said starting in 2011 it would begin teaching students in Grades 4 through 12 the basics of managing their money.
The crisis has also stirred calls for more regulation and oversight to protect investors. But so long as investors assume markets will always go up and that there are no consequences to living beyond one’s means, more red tape will have limited effect.
In the end, will we come away from the financial crisis any smarter? History isn’t very encouraging on that front. The line “this time it’s different” has been repeated over and over again during the last year, yet the root causes of this crisis—over-leveraging, lax regulations and ignoring risk—have played out before with disastrous consequences.
Perhaps the best lesson to take from the fall is to simply remember that sooner or later, it will happen all over again. Will you be ready?
