Good times lure many into debt, expert warns

Despite bitter experience from the last recession, the WindsorEssex region’s currently thriving economy may be enticing many residents to spend beyond their means, warns a bankruptcy expert.

“What we have seen lately — in the last three to five years — is even though house prices are up, people are taking on a lot of unsecured debt,” said Doug Hoyes, cofounder of Hoyes, Michalos & Associates, which last week released its annual debt and bankruptcy report for Ontario.

“Instead of spending $300,000 on a house, they spend $400,000. Then they need to fill up the house. They head out to buy new furniture or build a new deck out back. You end up with more bank loans, credit card spending and unsecured debt.”

In 2016, there were 896 consumer insolvencies in the Windsor area, which includes parts of Tecumseh, Lakeshore, LaSalle and Amherstburg. That’s a small decrease from the previous year, according to Hoyes.

At the same time, two other measures of financial stress went up slightly. The average unsecured debt — which includes personal loans, credit cards and student loans — was $46,367. The ratio of unsecured debt to after-tax income was 170 per cent.

That’s still better than the provincial average for unsecured debt, which stood at $52,634, and the Ontario debt-to-income ratio, which was 185 per cent.

The financial picture is slightly worse for residents of Essex County from Essex to Leamington, where housing purchases are likely the culprit for consumers taking on bigger debt loads, Hoyes said. The average unsecured debt was $55,326 and the debt-to-income ratio was 190 per cent. There were 286 consumer insolvency filings in 2016.

“One can only assume there are more people who are better off there,” Hoyes said. “They are living in Leamington or Essex and might be working in Windsor. They can buy a bigger place out there with their money, but then get into financial trouble by taking on more debt.”

It’s a dangerous game, Hoyes said. A sudden job loss, illness and even a reduction in steady overtime pay can start the slide toward inescapable financial woes.

Housing prices and the unemployment rate will dictate how those on the financial edge fare going forward, he said.

The Bank of Canada’s recent decision to start raising interest rates has already created reverberations.

The percentage of insolvent debtors in Ontario who owned a home at the time they filed for bankruptcy jumped in September to 10.2 per cent — the highest level since February, according to Hoyes, Michalos & Associates’ homeowner bankruptcy index for Ontario.

Interest rate hikes combined with the recent drop in housing prices in many Ontario markets has compounded the financial troubles of homeowners carrying too much debt, Hoyes said.

“We assume tomorrow will be like yesterday,” he said. “That interest rates will stay low and real estate prices will go up.

“What if something changes? What if there is no more overtime at the plant? What happens if NAFTA gets cancelled under Trump? Most people live paycheque-to-paycheque and will find it difficult to survive with less. You can’t just continually refinance and get more money.”

With the Windsor economy doing well, people should be paying down their unsecured debt — not adding to it, Hoyes said. “When things are good that’s the time to reduce debt, not the time to take on more.”

We assume tomorrow will be like yesterday. That interest rates will stay low.… What if something changes?