Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 1 - Evidence - June 23, 2011
OTTAWA, Thursday, June 23, 2011
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:35 a.m. to study the present state of the domestic and international financial system.
Senator Michael A. Meighen (Chair) in the chair.
[Translation]
The Chair: I would like to welcome you to this meeting of the Standing Senate Committee on Banking, Trade and Commerce.
Here with us today is Mr. Rock Lefebvre, Vice-President, Research and Standards, Certified General Accountants Association of Canada.
[English]
Mr. Lefebvre, thank you for accepting a somewhat last-minute invitation. We appreciate your attendance, which falls nicely after the appearance of the Governor of the Bank of Canada. Your association is concerned with household debt, as is the Governor of the Bank of Canada. In case you had not had an opportunity to see his statement before the committee yesterday, I will read what he said to set the tone for your intervention this morning. He said:
Last, the high level of household indebtedness has increased financial vulnerabilities in Canada. Canadians are now as indebted as the Americans and the British. The bank estimates that the proportion of Canadian households that would be highly vulnerable to an adverse economic shock has risen to its highest level in nine years, despite improving economic conditions and the ongoing very low level of interest rates. This partly reflects the fact that the increase in aggregate household debt over the past decade has been driven by households with the highest debt levels.
[Translation]
And he concludes by saying:
[English]
The elevated levels of household debt require continued vigilance.
No doubt, Mr. Lefebvre, you might agree with those comments. Without further ado, please proceed with your presentation, after which we will move to questions from members of the committee.
Rock Lefebvre, Vice-President, Research and Standards, Certified General Accountants Association of Canada: It is a real opportunity to be here before the committee this morning. As you may know, the Certified General Accountants Association of Canada, CGA Canada, has been speaking to indebtedness and borrowing in this country for four and a half years. Obviously, it has become of critical interest to many. We have published four papers wherein we rely extensively on information available from Statistics Canada. We also go back to consumers through online surveys to validate what is occurring in the statistics compared to the perceptions of Canadians. It is very timely today to speak to this. My message will be to underscore that the financial condition of Canadian households has deteriorated, sinking them further in debt.
I will read from a text, which has been or will be shared with the committee; and thereafter I would be pleased to address any comments or questions.
Our work on indebtedness of households was initiated in 2006 in anticipation of tougher times to come. At the time, Canada's debt-to-income ratio and debt-to-asset ratio stood at 121.3 per cent and 16.2 per cent respectively. These ratios have risen gradually with the debt-to-income ratio now at 147.3 per cent and a debt-to-asset ratio in excess of 19 per cent. The Organisation for Economic Co-operation and Development, OECD, has underscored the rising ratios as one of Canada's most serious Achilles heel. In more absolute terms, despite early warnings, total household debt has risen from $1 trillion in 2006 to $1.51 trillion by the first quarter of 2011. Moreover, 57 per cent of indebted 2011 survey participants, whose debt increased, report that daily living expenses are the main cause for their increasing debt. That is not encouraging because, as much as we scolded them four years ago for borrowing to buy consumer durables, it is unfortunate that we see so many borrowing just to survive day to day.
Our most recent reports — and, I believe there are some in the room — can be also found on our website, as well as the three predecessor reports that are helpful in setting the stage. Taken with concerns over pension plans and retirement income, the expectation of interest rate hikes, lagging employment and a potential housing price correction resulting from interest rate anticipation, we have cause to direct our attention to Canadian families, and we have cause to empower them to responsibly save, spend and borrow.
While our national or aggregate picture may not be alarming or distressful, we nevertheless underscore that national averages do conceal the vulnerability of certain groups to economic shock. Single-parent families, for example, have 66 per cent more debt than their counterparts; more and more retirees are entering into retirement with debt; households with incomes of less than $50,000 are six times more vulnerable in servicing debt. While the spike in bankruptcies has subsided, consumer proposals continue to be abundant — a condition perhaps afforded by the easing of consumer proposal rules.
At the same time, individual families in all cohorts typically are saving less. Canada is losing its penchant for wealth accumulation. Without unnecessarily belabouring the point, we need to appreciate that all of us are affected. Loan defaults impact all of us in the short term through resulting restrained consumer spending, which impacts all the economic indicators including, importantly, GDP, leading in the longer term to the potential for recessionary conditions.
As we know, it is not all bad news. Canadians are more optimistic today than they were a short year ago. GDP is heading in the right direction. Canada withstood the recession better than most, and we continue to enjoy a rich natural resource base from which to work. We have had productive work done in pursuing negotiating trade agreements. Perhaps our way forward here today is to continue to build on those strengths while choosing to address our weaknesses. The opportunity is before us, and the mood may well be right to effect change.
CGA Canada continues to be supportive of the work of the Task Force on Financial Literacy and is encouraged by the federal government's budget allocation of an additional $3 million to the Financial Consumer Agency of Canada to undertake financial literacy initiatives. Complemented by a dedicated appointment of a financial literacy leader to promote national efforts, we continue to contend that this initiative can contribute substantially both to empowering Canadians to assume greater understanding of and prowess in financial management and in curbing borrowing behaviour. Without going overboard, in the longer term, families and the overall economy could be well served should a return to an approach of wealth accumulation and cash-versus-credit philosophy be promoted.
We are confident that the state and the dynamic of the household sector's balance sheet will remain high on the radar of policy-makers and decision makers. Even in the four years that we have been monitoring consumer behaviour, we have witnessed increased interest in the subject and are beginning to see the emergence of a new paradigm where a balanced approach to spending, saving and paying down debt is becoming better entrenched in Canadian society, or at least less shunned.
When we started working in that area and came out with some of the messages that reverberate today, some people thought we were perhaps being alarmist. I say that to help set the stage that we have seen this coming for a while now, and we have seen apathy setting in the minds of Canadians.
While it may be premature to speak of lending reform, there may be opportunities to work with financial institutions and to more closely examine to ensure that lending arrangements match loan products with borrowers' repayment plans; reflect mortgage qualification requirements and standards that reduce risk of default, debt spiralling and equity erosion; involve a needs-based lending versus a cash-flow lending philosophy; and includes ways to contain borrowing costs to the borrower. In short, we would like to see a system that is conducive to wealth accumulation — one that maximizes household efficiency and optimization.
The Chair: Thank you, Mr. Lefebvre. Before turning to questioners, I will ask one clarification question.
Could you amplify a bit on the first recommendation that you have listed, namely, ``match loan products with borrowers' repayment plans''?
Surely one of the primary needs and duties of a lender would be to do what they could to ensure that the borrower would be in a position to repay; otherwise, it would go into default, and no one would win. This must mean something else or something in addition to that.
Mr. Lefebvre: We would be interested in seeing some strengthening in that area. We very much like the rule changes made to mortgage insurance that is backed by the government. The caveat I would add is that only 23 per cent of mortgage holdings are held through commercial banks. Many people have mortgages that are not covered by banks, and there is some slippage on the rules.
The Chair: Who will be covering them mainly?
Mr. Lefebvre: It will be private mortgage lenders.
The Chair: Would they constitute by far the majority of the market?
Mr. Lefebvre: Yes.
Senator Harb: Concerning the debt-to-income ratio formula, what is the optimal figure?
Mr. Lefebvre: As you can appreciate, it is hard to set that number. We hear from other experts that they would like to see it in the range of 138 per cent to 142 per cent. Over the years, we have seen authentic bank research that suggests that Canada can withstand up to 150 per cent. That said, I do not have the perfect number for you, senator.
Senator Harb: Along the same lines, what would be considered fair game for the debt-to-asset ratio?
Mr. Lefebvre: That is a little easier to peg: It should be closer to 15 per cent or 16 per cent.
Senator Harb: It is a little problematic, to be honest. I am sure you agree that back in the 1990s, for example, when you went to borrow some money to buy property, you would pay anywhere from 10 to 14 or 15 per cent. Today you can go to a bank and, depending on what term you are looking at, you can pay from 2 per cent up to 5 per cent. When you talk about the debt-to-asset ratio, it is very abstract. We should be looking at the ability of the consumer to service the debt based on both the terms under which particular consumers have borrowed the money and the length of the repayment.
Your organization is a credible organization that has done a tremendous amount of work over the years in this area. Have you done any computer simulation arrangement to give us, as policy-makers, some idea of what we should anticipate? Obviously, the picture is not pretty, particularly given the situation in the U.S. and the fact that if the U.S. goes into a bit of a dip, we will take the hit double whammy. First, consumer debt is very high, as you outlined; and, second, the market would shrink.
Mr. Lefebvre: We have crunched some numbers and find that a 2 per cent interest rate hike, for example, would raise the service costs on a $250,000 mortgage by $15,000 over a period of five years. That is roughly $2,500 a year more. Under times of solid performance, that does not necessarily have to be seen as an issue. However, considering how taxed Canadians are right now, that will be problematic.
As we follow the logic of that calculation, we come to see that, to meet that obligation on the mortgage of which you speak, they would have to cut spending in other areas by 9 per cent. It will come out of the economy anyway.
Senator Harb: Let us say, for example, that Senator Oliver goes to a bank because he sees a duplex in Nova Scotia that looks like a good investment, and he wants buy it. If I take your analysis here, Senator Oliver's income of $140,000 to $150,000 and his debt-to-asset ratio, which would be a percentage of the cost of the duplex, does not seem to be taken into consideration — that is, the fact that there is an income that comes into the picture. Where does that fit in your analysis, if at all?
Mr. Lefebvre: We have looked at it. In fact, it is one the challenging areas because if we rely on Statistics Canada, we see encouraging news. I believe the number they are using is an equity ratio of 67 per cent in our properties. However, if we go beyond that number, which includes all types of property, plant and equipment, actual housing equity is down to 38 per cent from the 55 per cent it was a few short years ago.
Investment and entrepreneurial undertaking is working in the right direction and disproportionately affecting the average. However, if we look at a typical household of someone who may not have the means of Senator Oliver, that household is losing all the time.
Senator Harb: The 23 per cent versus the 67 per cent is not fair in a sense. If we go back to the example of Senator Oliver, if he were to buy a property that is over six units, he would have a hard time getting a mortgage for six units and up from a commercial bank. However, he could go to alternative banking, whether it is insurance, special funds and so forth, and still get the mortgage for the same rate or less than at the commercial banks. I want to caution you that taking the 67 per cent figure as being high interest is not necessarily so because of two elements. First is the income that would be missing from that component, although he is an individual, the same person with the same annual income, he has an additional income. Second, the rates he is getting from the alternative banking arrangement might be the same or less than that of the commercial banks.
Mr. Lefebvre: I am sorry if I suggested that he would be prone to higher interest. The 67 per cent I was speaking to is the actual amount of equity that we, as a collective society, hold in property, plant and equipment. I was not speaking to interest rates; I am sorry if I misled you there.
Senator Oliver: Thank you for your presentation. There were two aspects to it: one is personal debt and the second is wealth accumulation. I want to deal with the latter.
I was a little shocked to hear that Canada is losing its penchant for wealth accumulation. One excellent thing that the Harper government has done in terms of personal finance is to bring in the Tax Free Savings Account, TSFA, which is different from a Registered Retirement Savings Plan, RRSP. You, your wife and other members of your family can put $5,000 in each year. You can take money out if you need it to pay a bill, or you can leave it in so that it can accumulate; anything that accumulates is not taxable. That is a wonderful way for Canadians to accumulate wealth.
If you had a son who was 18, and you encouraged him to put money into a TSFA for the next 40 years of his life, it would be better than even an RRSP. The limit of the TSFA is about to increase from $5,000 to $10,000 per year. That will do a great deal to help Canadians accumulate wealth.
What do you think of the program?
Mr. Lefebvre: We are fully supportive of that initiative. We thought it was a wonderful thing when it came out, and we continue to believe it is wonderful. The challenge we run into is that the people I am speaking to you about today cannot even meet their debt, let alone put $5,000 aside. However, it is a wonderful initiative and should be maintained. RRSPs are also wonderful and should be maintained.
The purpose of doing our survey with consumers is to ask them about their familiarity with these programs. It is weak. Forty per cent have never heard of the TSFA. Many do not invest in them, and even when they do, they will start with a certain ambition and put in $100 for a couple of months and then discontinue. That is the apathy or inability.
Again, at the risk of sounding bold, people such as the ones around this table understand these things and have the means to invest in them. However, the world out there — the Canadian consumer — does not understand these instruments. They have not been taught to accumulate wealth, as I suggest in this brief. The attitude of consumerism is such that we borrow the maximum that we can afford to repay, so there is no thinking of putting aside $10 a month or putting it in some type of instrument or vehicle, even if it is tax-sheltered. That is at the bottom of this.
The real message is Canadians do not know how to optimize or do not have the ability and the means to optimize what is already available to them. We do not call for more relief or savings incentives in this area because there is a lot of good stuff that we do not use. The popularity of RRSPs peaked in 1997, so perhaps it is time for a policy shift or more of a marketing campaign. Much of the awareness has not reached the people you are trying to reach.
Senator Oliver: What happened to RRSPs in 1997? Did people stop contributing?
Mr. Lefebvre: It has been dwindling. The contributions rates have been going down since then. We did research in that area a couple of years ago, and we highlighted that we think it is a marvellous program. However, we have not continued to promote it enough so that Canadians are relying on or using it.
Senator Oliver: You mentioned the Task Force on Financial Literacy. Is your organization doing any work hand-in- hand with them to try to educate Canadians more about the management of their personal finances?
Mr. Lefebvre: We would love to have a role once the leader is appointed, and should there be a role for us, we would be happy to help in any way.
Senator Oliver: In the United States, the economy is still struggling because so many banks are still taking over people's houses because they cannot pay the mortgages and have walked away. Is there any threat of anything like that happening in Canada over the next five years, or is the financing of our personal houses under control?
Mr. Lefebvre: I could never say it would never happen, but that said, it is my personal sense that we are in good shape. We have seen ourselves come out of this recession. We have recovered nicely. Our financial institutions came out in good shape, and many protections are in place.
However, one of the reasons I am speaking to you today is that if we do not address the debt that many Canadians are carrying, the day will come when they will not be able to service the debt.
Senator Oliver: Even on their homes.
Mr. Lefebvre: That is correct. More likely, given our topography in Canada, housing values will go down rather than people simply losing their housing. There is still abundant demand for the supply.
The Chair: Mr. Lefebvre, other than the Task Force on Financial Literacy, which you spoke of in an approving fashion, how do we get the message out to Canadians? Should we be more inventive in the mediums we use, such as the Internet and so forth?
Mr. Lefebvre: I would love to see a pushed strategy, a true campaign by the government, full-page ads that explain to average Canadians what these instruments do and how to use them.
We will often see this type of information come from financial planners, institutions or commercial banks. Unfortunately, and I do not intend any disrespect, that is always a little biased. When we see the good things that the government is doing but that then relies on commercial banks to move them through the market, we think there is an opportunity for government to start educating.
When we talk to average Canadians, we do not say, ``Go see your accountant or banker to take their advice.'' We say, ``Go see your accountant, banker, lawyer and realtor. Educate yourself and assume responsibility.'' That is what is lacking. Even when they say that they will assume responsibility and go to the bank to find out how the Tax Free Savings Account works, they then get overwhelmed, so there must be much more education.
When we talk about financial literacy, we recommended that four years ago because we wanted to get to the young people. Right now, we have a whole generation that has not been educated on wealth management. Somehow they will fall between the cracks; there is no doubt. However, everything we can do to help them understand and pass the message that it is their responsibility should be done.
I am not one to think government has to fix it all. The consumer has a big responsibility, and the lending institutions can make it better for society by putting in tighter rules. For example, there should be higher minimum payment requirements on credit cards and loans. Little things can be done. Wonderful stuff was done on credit cards last year, but other little tweaks can be brought to the system to help Canadians avoid getting into the trap that some of us are in today.
The Chair: Thank you. I wonder sometimes whether the fact that we get half a percentage or quarter of a percentage of interest on savings has not had a discouraging effect on people.
[Translation]
Senator Ringuette: I have actually been interested in this whole credit card issue for the past three years, and your recommendations are accurate. This committee studied the matter and one of its recommendations was to set the record straight for the minimum payment, which used to be 5 per cent of the balance ten years ago.
Over time, the financial institutions have reduced the minimum to 2 per cent. We know very well why; because at 19 per cent, 24 per cent and even 30 per cent interest, they are making a lot of profit. It would also be good if we put restrictions on the pervasive marketing of all these credit products.
I get a credit card offer at least twice a month at my home. It is all well and good to want to educate the public about financial instruments, but we also have to understand that these financial institutions make billions in profit and they can invest millions in marketing so that Canadians have not one, but four credit cards, with ever-increasing limits and reduced minimum payments. I do not hide the fact that I think the government has no interest at the moment in imposing barriers on the financial institutions. That is one of the major problems: they have no intention to do so. It is all well and nice to encourage financial literacy, but the institutions responsible for providing these financial instruments should also have a social responsibility towards all Canadians.
The Chair: Do you have any comments?
Mr. Lefebvre: I would simply like to say that institutions have the opportunity to consult with the governor of the Bank of Canada in order to look at what the limits should be, since even 5 per cent is not enough. Interest fees are going to devour everyone. Changes are needed; not in every area, but some areas should be examined. The opportunity is there. Even the institutions that are going to say that they will be losing major profits can perhaps take this opportunity to lend money to business investment. There is room in this market for SMEs.
Senator Hervieux-Payette: We are talking about interest and repayments. There is supposed to be a rule that says that the person who gets the card is able to make the payments. Whatever mechanism is in place, I get the impression that it is not working. That is supposed to be the rule.
Like my colleague, I receive these applications telling me that they do make sure. But if they do not make sure that the person who gets the card is financially accountable and the person receives five cards like that, clearly no rules are being followed. However, when I applied for my first credit card, about the only thing they did not ask me was if I had had my first communion. I think the questions on our fiscal accountability have changed.
In your opinion, what mechanisms could be put in place to find out the financial ability of the person to meet the requirements of their credit limit?
Mr. Lefebvre: I think we are expecting too much. When we go to the bank, they will assess our situation and determine how much we can afford per month. That is the problem. At some point, your credit limit goes up or you qualify for other credit cards because your income has gone up or something else happened. Unfortunately, that is what gets people. Sometimes, there is no continuity; perhaps there is a reason why your income was higher than the previous year or why you were able to meet your obligations more easily than last year. But once you are in the system, the credit cards keep coming, unfortunately.
Another good example is the students who are starting university in the fall. In the first week of school — the most expensive years of their lives — they receive a credit card. So there is no control. In no way should a student be allowed to have a credit card with 19 per cent interest.
That is what I mean when I say that there is an opportunity to look at what is happening and how it can be prevented. As I was saying, the culture of the society plays a major role. People have been so conditioned. We hear stories about people borrowing $20,000 to buy a car. They go to the dealer and they reach a deal. They go to the bank and they are told that they can afford a $30,000 car based on their ability to meet their obligations. The poor guy leaves the bank with a $30,000 loan. Interest rates go up and the car disappears.
The Chair: Educating people can solve this problem, correct?
Mr. Lefebvre: Consumers need to be educated and there have to be rules and laws to prevent people from borrowing the way they are doing right now.
Senator Ringuette: I completely agree with you. We need mechanisms that require financial institutions to be accountable. This is push marketing. They push people to borrow. Why? Because at the end of the day, the more people borrow, the more money they get. And now, with the current government, the lower their taxes. So they have everything to gain without being accountable.
[English]
Senator Tkachuk: I do not want to get into a big debate about credit cards. However, credit cards are about choice. You can get a credit card that charges 5 per cent, and you can get a credit card that charges 28 per cent. If you do not have the educational tools to figure out which is cheaper, then I suppose you will be spending a lot of money on the higher percentage rate credit card.
I want to go back to a point that Senator Meighen made about the TFSAs and RRSPs. You had mentioned that they have been declining. In my view, that is because citizens are unaware of investment opportunities and investment possibilities. I do not know where we can lay that blame, but it is a problem.
Of course, most citizens will not use the TFSA if they do not go to a broker or have investment accounts. They have savings accounts. You cannot make any money in the savings accounts, so there is no incentive to put money into a TFSA. The only way to put money into a TFSA or RRSP nowadays is to go to a brokerage firm or open and manage your own investment accounts and collect dividends. That is a process many citizens do not know anything about. I believe it is the reason the numbers are declining and there is no incentive to save. There can be many tax-free savings accounts, but if there is no interest, it really will not matter much.
That is where education has to come in. It has to teach that opportunities exist other than simply interest for people to make investments, not just the fact that the TFSA exists. Most people know RRSPs exist. That is one point I would like to make on which I would like to hear your comments.
My second point is about household debt. To me, there is debt for investment, such as buying property. I notice that many people are buying cottages. That is becoming a huge business, and maybe it is the result of people my age retiring and having two homes. I am aware of such properties in Northern Saskatchewan. The price of a lake front lot has increased from $100,000 to $500,000. Perhaps people are getting into debt through buying large homes, which I also notice is increasing, as well as credit card debt.
Do you differentiate? There are two kinds of debt: First, a person might use a credit card to go on a vacation or purchase consumable goods that they cannot afford; or second, a person might use a credit card to purchase an asset.
Mr. Lefebvre: We used to refer to it as good and bad debt. Whether that was right, I will not get into. However, it became common to presume that all mortgage debts were good debts because they were backed by assets. That has to change. Many people have the sophistication to tell the difference between that which is a home and that which is residential and that which might be a commercial pursuit. In large part, when you have low interest rates, everyone thinks he or she is an investor. They leverage themselves on a house worth $500,000 or $1 million. One of two things will happen. The interest rate will go up, and when it does, it is a double whammy. Suddenly they will have $800,000 owing on a house worth $775,000. The default then happens when these people walk away. You are hitting the nail right on the head, and that is why we have to teach Canadians what 4 per cent means versus 2 per cent.
Senator Tkachuk: It is double.
Mr. Lefebvre: Absolutely.
Senator Tkachuk: People think it is 2 per cent more, but it is double. If it goes to 6 per cent, it is triple. When a bank says that it has increased the interest by 2 per cent, it means that it has doubled, which means 100 per cent.
Mr. Lefebvre: Your first point is similar in my explanation. Sophisticated investors know that 2 per cent is not a huge return. However, the average young person should forget the investment side of it because it is a saving. Even if it is 2 per cent or 1 per cent or 5 per cent, they are not being taxed. It is about wealth accumulation, as Senator Oliver said. It can be $5,000 this year and $10,000 next year and keeps ramping up; but that is gone. The kids are not saving — kids to me are those under 30 years. We have trained them to go to the bank to borrow what they can afford on a monthly basis. There is no provision for saving, irrespective of the interest rate. I would love to see them invest and get the tax break. Even if the RRSP pays nothing, put aside each year the tax break on $5,000 or $10,000. These people could retire relatively wealthy, instead of living the lives we are carving out for them in total apathy.
Senator Tkachuk: They should not spend the tax break.
Mr. Lefebvre: Absolutely; you raise a good point. How can we teach them? I am fortunate in that I come from a family that always talked about finances. That is why I am accountant. My parents did not make tons of money, but they will never be the government's responsibility. I have led my life in the same way. I have three 20-year-old children who are maxed out on RRSPs and TFSAs. You can teach people and hold them accountable and responsible. That is what we must do. If we have to limit their borrowing, so be it.
Senator Tkachuk: Do we have teaching packages for high schools? Provinces manage the education system. I believe some research shows that when kids finish high school, they do not know anything about investments, enterprise or the capitalist system. They know much about the socialist system; and that is a fact. They may even have a little knowledge of the history of communism but not of its consequences. They do not know anything about the market system. If you ask them, you will find that they do not know.
I do not know what they are teaching at university these days, but it is a lot different than what I was taught at university. If kids today do not know the difference between a credit card at 5 per cent and one at 18 per cent, then we have a serious problem with how they were raised and what they were taught. It is not the fault of the banks that a person cannot make a decision and know the difference.
This is a big issue, and I hear about it all the time. No one seems to take responsibility. It is all someone else's fault. Individuals have to be responsible; and that is a serious question.
Mr. Lefebvre: It is a shared responsibility. Four years ago, I tended much more toward holding consumers responsible. I was ambitious and said that we were to educate the lot of them, continue to write reports, and talk about TSFAs. The reality is that it is difficult to do. We will miss a generation. Let us get the kids learning it in school so that it becomes second nature. It is a case of teaching them how to allocate the pie. They have lost all sense of that because they can simply go to an ATM, which they think has an endless supply of cash. When they go out into the real world and want to borrow $20,000, a bank might say that they qualify for $30,000 and might as well use it; and we do.
Do not get me wrong: The banks are wonderful, but they are ambitious and want to increase their profits. They can still make the profit — I have no problem with that — but they should not lend to the kids. Eventually, it will affect the banks. As I said in my opening remarks, it will affect all of us when consumerism slows down, which it has done. The GDP could move into the red again when all the people put on the brakes. Even now we are encouraged that consumer credit has stopped going up, which is marvellous. However, it is not as if we have backed it up; rather we have stopped accumulating at the growth rate. We are not out of the woods. I am sorry, Mr. Chair.
Senator Massicotte: Thank you for being with us today. Our job is to try to get the facts, and then develop judgment calls. I see your graphs, and the Bank of Canada issues similar graphs. I agree with all the comments expressed by you and my colleagues here. We have a serious indebtedness problem that we should attend to, which we studied in the past.
I also want to ensure that we understand the facts and that our perspective is better balanced. The graph you refer to is debt divided by income, which is a capital matter, which is called debt, and an income matter, which is all income. A financial analyst uses many kinds of analyses, and I am not convinced that that is the best analysis. Yesterday, the Bank of Canada gave us a report showing that the net income for a Canadian household has gone up consistently, including last year, since 2006. You would argue that a large component, three quarters of that, is houses. Are houses are a good investment? They are not bad in my opinion. Maybe the test I would use, as we use for companies, is income to income: ratio of debt service to the available income, because then you have an income component divided by an income component.
Statistics Canada published the findings of two surveys this month. One is the ratio of debt service on mortgages to the ratio of total income. Looking at it from 1990 forward, we see that it went down from 6 per cent to 4 per cent. Although there was a little blip in the last year or two when it went up a bit, there has been immense progress in the last 20 years. The amount of income used for mortgages has gone down dramatically by 50 per cent.
One could argue that there is a lot of other debt. Another graph published in June 2001 on Canada is a ratio of total debt service, including consumer debt and mortgages, to total income. That has gone down from 14 per cent in 1990 to 8 per cent today. Again, there was a little blip in 2008 and 2009, but it has consistently come down.
You have the debt-to-income ratio at 147 per cent, but I would argue that the other ratio is probably more relevant. You pay interest expenses with income, not with other debt.
The report that we received from the Bank of Canada yesterday also shows an analysis of sensitivity of interest rates. If interest rates go up by half a point, what is the impact? It is noted in the report that the impact is important. Your analysis is also very important, especially with certain segments of our population that are extremely exposed to it, such as single-income households. The report gives an analysis that the default rate will go up if rates go up. It is an important component, but does not spell disaster for Canada.
What is the right number? I do not think anyone knows the right number. The good news is that we have made immense progress over the last 20 years, and the ratio of income to service debt has come down, including consumer debt. Is the ratio too high? It is always too high.
I am trying to balance all this. I am not an alarmist. I wish Canadians to be less indebted and much more knowledgeable about the levels of interest rates. However, if I were a fairly balanced person, I would not leave here and be scared, as one might be depending on which graph were read. Would you like to comment on that?
Mr. Lefebvre: We study many ratios and relationships. We speak about the debt-to-income ratio because it is the one that the majority of people understand best.
Senator Massicotte: Is that because it is complicated?
Mr. Lefebvre: No, it is rather simple, right?
The other thing we have to be careful of is if we look at a number of indicators, in fact most that we look at, even if we take the good news that we probably heard yesterday that net equity grew 1 per cent over the last year, which is encouraging, let us not forget the consumer price index, CPI, went up almost 3 per cent. Therefore, we are not even keeping up with inflation.
With those graphs, and whether it is done by us or anyone else — we have all been in this business for a long time — we can have graphs that depict anything, quite frankly. However, if you look at all the indicators, employment is lagging, for example. If you look at discouraged workers, the unemployment rate is not 8 per cent, it is 11 per cent. For those under 25, it is almost 20 per cent. We know the interest rates will go up. They cannot go down. Taking all these things together, irrespective of my graphs or anyone else's, that is the reality. I think your approach is very wise, and I agree that there is no reason to be distressed or alarmed. Canada's economy is fine, the banks are fine. However, it is the individuals, the 50 per cent less affluent part of society, who will be hurt, and they will affect the rest of us.
I probably did not answer your question.
Senator Massicotte: I am just telling you what I read. You are basically saying the income-to-income test is the best test. I agree. Interest rates are very low. We will not have the 16 per cent or 14 per cent interest rates that we had in 1991 from what I see. One can reasonably predict it will go up a bit, but it will not go up by 3 per cent or 4 per cent. Therefore, I think the income test is the best one.
Your argument is that we have to look at other economic factors, such as the high unemployment rate, and that does not include the other unemployment. Again, my response is that in the last 20 years, in fact 6 or 7 years ago, it was stuck at 10 per cent in Canada. That is the official unemployment; with the same argument, you could add another 5 per cent. If you compare apples to apples, we could be doing much better in Canada, but I would argue that we are doing pretty good. In fact, unemployment is reasonably low. If you compare it to our peers, the United States and Europe, we are doing very well. Yes, I would say that there are some hurdles on the road, but it is a pretty good situation for Canadians.
I am trying to take away the alarmist ringing-of-the-bell approach and saying that it is not bad. There are many challenges. We can argue Canadians are not well educated financially, but they are certainly better educated than they were 20 years ago. Things are getting better. Yes, some are aware of communism, but maybe only in Saskatchewan because they have the experience of it there.
I would argue that I am concerned and we should attend to it and pay attention to it, and then I would argue more significantly in relation to a possible housing bubble, especially in Vancouver, British Columbia. I would say that if managed well, we are doing a pretty good job. Let us continue doing a pretty good job, and let us be responsible, but do not yell that the house is on fire. Those are my comments.
Mr. Lefebvre: I agree with those comments.
The Chair: Thank you Senator Massicotte. Questions seem to be in short supply this morning. Everyone is waxing eloquent in their editorial comments. We will go to Senator Smith and hear what he has to say.
Senator L. Smith: I am not going to make a speech. I would like to hear the witness's top five. My kids are all in their 20s and 30s, and they love the top five. What are the top five messages that you could give us that would be helpful to society, besides save, save, save, save and save?
Mr. Lefebvre: First and foremost is altering the culture, and that is about awareness and financial literacy. Some of those things are happening, but that has to be pursued. People have to be made to understand that they are responsible for their financial planning and their debt.
From there I think about the opportunity before us. I really appreciate those last comments that were made. We have to appreciate that our economy is in fine shape. However, it is nevertheless incumbent upon us to get the financial institutions to behave differently, whatever that means. There are a number of things. We have talked about a couple of tweaks that could be brought to the system around the rates or the amount of borrowing that can be done or the minimum payments made on a monthly basis. Those little things can be done. The banks likewise should be selling investment product or pushing investment product as much as lending product. I believe this is a net win. If we create those environments or those relationships, banks can make more money. I do not think banks have to lose if we do these things. They will just make less on the backs of consumers.
Government policy has to create incentives for more business investment. That is the part of society right now that is being criticized because only 18 per cent of GDP is actually business investment. I am suggesting that perhaps banks can let the consumers free for a little while, and we can move all of our thinking toward businesses versus individuals or taxpayers.
There are a number of strategies. I would be happy to write them all down and send them to the clerk of the committee, if that would help. Some of them get rather convoluted.
Senator L. Smith: Those are three good ones. Do you have two more left? I always ask for a top five.
Mr. Lefebvre: It is the save, save, save. In relation to wealth accumulation, I want us to not forget that we have an obligation. Accountants and people on a committee such as this, it sounds mundane, but we have to teach people how to accumulate wealth — the little things, the big ways. Everyone is an investor today. Everyone is buying a house today because the interest rate is low, and their neighbour bought a house, and the bank is lending them money. That is where I do not blame the banks. People have to assume that responsibility and think about whether they can afford a $600,000 house at 30 years of age.
Even if you look at car leasing, for those of us at a certain age, in the 1980s, I said that car leasing would never take off because it did not make sense. Now car leasing is the way you can get into a $60,000 car when you can afford a $40,000 car. Where is the wealth accumulation there? People owe money on cars for six and seven years. The car depreciated out two years ago and is rusting out in the backyard.
I am supportive of anything that improves that situation.
Senator L. Smith: This is a summary of your five messages: alter culture; get financial institutions to act differently; save versus spend; government policy for business investment; wealth accumulation; and individual discipline. We could then prioritize it from that.
Mr. Lefebvre: I will quote that, actually.
Senator L. Smith: I did not want to give a speech.
The Chair: Mr. Lefebvre, one reads in the paper every day that economists are wringing their hands; there is a terrible danger that consumers might stop spending, which will slow the economy down. Should we be critical of them too? Should we tell them to shut up and not urge consumers to spend recklessly?
Mr. Lefebvre: On any given day, we can be right or wrong on this matter. Where I tend to agree with those economists who are trying to suggest caution is that, while we are pleased to see the growth in consumer borrowing come down, no one can tell us if it is down because we are behaving differently or because we may have reached our saturation level. That is why the economists, I think, are suggesting it will slow down. Employment is lagging. There are no real economic engines going right now.
Senator Moore: Thank you, Mr. Lefebvre, for being here.
In your suggestions to improve the consumer debt situation, you talked about higher minimum monthly payments on credit cards. You also, prior to that, mentioned that only 23 per cent of mortgages are held by banks, and the other 77 per cent are held by private mortgage lenders. The 23 per cent held by banks, does that include Canada Mortgage and Housing Corporation, CMHC, as well?
Mr. Lefebvre: They are backed by CMHC.
Senator Moore: In your suggestions to improve the situation, you did not mention anything about increasing the minimum down payment required to buy a house. I was brought up that you saved money and paid your way. If you had to save 20 per cent, you did that before you bought the house, and you knew what the payments were. I can think of — and Senator Oliver will remember the practice of law — clients coming in and talking about borrowing money over 25 years. They show the amortization schedule, and you would suggest that they do it over 20 years, or 18, 19. There is no magic. That is what the bank says. They would see the savings, tens of thousands over the years, but they still would not do it. Somehow, for whatever reason, even though the numbers are looking them in the face and the savings are there, they would still stick to the bank's lending advice.
I do not know how we turn that around. I would like to know if you have any thoughts about increasing the minimum payment required to buy a house.
Mr. Lefebvre: We have not run any numbers to isolate what the right number might be. Anecdotally, I would be prepared to say that the current number is relatively low, given the cost of owning a home. It is a low threshold to get into the game.
Senator Moore: Some are zero per cent. How do you build up the pride of ownership, where you have a little money in the game and you say, ``I am going to look after it, fix it up and improve it''? That is a big part of the individual incentive. If you own a house, you have to look after it and all the rest of it.
How do we do that? You mentioned the banks' lending practices. How do you convince individuals that owning a home and building up your equity is a great way to accumulate wealth? It does not have to be the TSFA or the RRSP. This is a great way to build up equity. How do we convince people to do that?
Mr. Lefebvre: We commonly accept in Canada that housing equity is a strong market to be in, and there is no denying that. However, in fact, many Canadians do not know what ownership costs go with owning a house. They do not know about closing costs or many of those things. The younger cohorts and those less affluent are actually losing money on their houses. Those who make money, it is because of appreciation.
My concern is that when interest rates go up, the appreciation will slow down; it has no choice. Taken in combination with the mortgage insurance rule changes that transpired recently, we will not continue to see housing appreciation.
Senator Moore: It cannot keep going up.
Mr. Lefebvre: That is the concern. All I am doing is questioning the common wisdom that housing equity is always the way to go.
Senator Moore: Seventy-seven per cent of mortgages are held by private mortgage lenders. Are there any rules under which they must offer to lend with respect to interest rate, minimum down payment and amortization periods?
Mr. Lefebvre: We did not examine that.
Senator Moore: That is a big portion, 77 per cent of mortgages being privately held.
Senator Massicotte: I expect that 80 per cent of those are insured by CMHC.
Mr. Lefebvre: Actually, 23 per cent of the mortgages included in that number are insured by CMHC. Some of them may not be qualifying, and some of them may be through other private lending houses that do not have access to the insurance. I was suggesting that 23 per cent are backed by CMHC.
[Translation]
Senator Hervieux-Payette: I would first like to congratulate you and thank you for your report. I think it is meant for us, but also for all Canadians.
I am going to advertise for you a little by saying that the report can be accessed on your website. All Canadians who are listening to us, perhaps today, can have access to the same report. We are having a discussion with you, but the main reason for inviting you was the report and your company's efforts. In the end, it is for the benefit of all Canadians.
Having said that, when you talk about educating people, who do you think we should start with? The parents who did not educate their children or the children because we missed the parents? In Quebec, everyone knows the more or less religious Caisses Desjardins. I remember that my children and I had the little book to deposit 50 cents a week when we went to school. Right from the beginning of elementary school, we started to learn how to save money. After that, we went on to secondary school, we moved and deposited money somewhere else.
But now, I do not think that my grandchildren have ever heard of an activity like that. They are on their third cell phone at 15 because all they have to do is ask their parents, who then buy cell phones with a three-year plan, contract and everything.
How can we educate people? What are the tools, the mechanisms? A section in the Bank Act imposes a social responsibility on banks and requires them to invest a part of their profits. Now that they are fully responsible, they have to prepare a report every year. Would you be in favour of having part of those profits go to a foundation whose only purpose would be to educate Canadians on the economy and how it works? Since banks are the ones doling out credit cards like playing cards or like surprises in cereal boxes, I would not trust them with that task. But if the responsibility went to a foundation that had access to a substantial amount of money, that would be one solution, in my view. We are talking about several millions of dollars and, basically, a big part of the problem has to do with the fact that banks have made credit so easily accessible to everyone. I think there needs to be some sort of balance between offering credit and educating people.
Do you like my suggestion or do you have other ideas?
I think that is key. My colleague talked about marketing, but the purpose of all marketing efforts is to make us buy something. But because of that — perhaps my colleague is not aware — we have credit cards like the ones from the Bay with 29.9 per cent interest rates. I am telling you this because I have just received a notice of a 1 per cent increase. Let me tell you, we have every reason to pay our bill!
We must know that all the big stores that offer credit cards — cards that are another company's property — are paid automatically. Whatever I buy, they receive the payment and another company owns the cards.
The Chair: And the risk.
Senator Hervieux-Payette: And the risk, yes. There are a number of players. At the end of the day, the financial sector is the one that deals with the whole issue of debt and being in debt.
Do you have other approaches or are you ready to think about that and come back with suggestions? I would personally suggest the two levels: parents and children. People have to start young. Children now are not educated like their parents were. We could also use the Internet. I do not know; it is a suggestion. We are here to try to find solutions. Also, I do not think that the government should get involved in this. I think it is the sector's responsibility to find a balance between making money and educating.
Mr. Lefebvre: We have not looked into the possibility of a foundation or something along those lines, but we would be in favour of an approach like the one you are suggesting.
As I said earlier, I am not sure we can change a particular generation. We should not force banks to invest too much. We can maybe simplify things; they would be responsible — required is perhaps too strong, but responsible — to hold seminars or conferences once a year or every six months. That is what they do in Quebec. They do it less in the other provinces.
I also think that we have to make sure that this is in the elementary school curriculum. In Quebec, I believe 5,000 students have recently been registered in a program. The only reason we know that is because they used our report from last year to create the content for the course.
So we would very much like to see that in the elementary school curriculum, but I cannot disagree with anything the banks can do to increase people's sense of responsibility.
[English]
Senator Moore: In response to Senator Smith, you mentioned that culture is one of the things that needs altering. We see advertising on television for furniture, automobiles and so on. The culture is not about being able to afford to buy, owning, and building up equity again; rather, it is about what is the monthly cost.
That is the culture of the young people. I know some car dealers who are amazed at the amount that kids are taking on. They do not consider that with a lease, they will not own it and that they have to insure it and pay many other charges beyond the lease or the purchase.
I do not know how you educate people about this, but it is a big concern.
The Chair: These are serious societal issues. Thank you, Mr. Lefebvre, and thank you to the Certified General Accountants Association of Canada for highlighting these issues. You may not have instant solutions, but you have our minds wrapped around the problems. I know that colleagues will be thinking about this while they are enjoying themselves this summer. This is our last meeting, I suspect, before the summer break, so I think we can say that this ended on a high note.
I want to thank the deputy chair, Senator Hervieux-Payette.
[Translation]
I would like to thank Senator Hervieux-Payette for suggesting to us that you could be here this morning. We have had an interesting and productive discussion, thanks to you. If you have any additional comments for us, do not hesitate to drop a line to the clerk.
Mr. Lefebvre: Thank you for your attention. It was a great pleasure to be here this morning.
(The committee adjourned.)