By Barry Nykyforuk, Licensed Insolvency Trustee
We keep hearing in the news that inflation disproportionately affects low-income households. But what happens when “lifestyle inflation” meets real-world inflation?
What we’re observing is that a growing number of middle-class and higher-income Albertans with well-paying jobs are feeling the strain of rising mortgage and interest rates.
Things that were affordable a couple of years ago now feel like luxuries. Those previously considered financially stable are now finding themselves in a precarious position.
In many cases, people are rethinking their spending priorities to free up income. For those who have taken on substantial debt to support their lifestyle, we are seeing an increase in applications for debt relief through consumer proposals, which are at a record high.
Let’s examine why more money often equals more problems.
“Lifestyle Inflation” describes a phenomenon that we can all relate to. In the simplest terms, the more you make, the more you spend.
It’s human nature. As you advance in your career, you expect your standard of living to be better. Unfortunately, it’s easy to get into debt by trying to “keep up with the Joneses.”
A shiny new car or pickup. A bigger home in a more attractive neighbourhood. A snowmobile or motorbike. Exotic vacations. Big nights out. Furniture. Clothing. Kids sports. It all adds up.
The challenge is that spending starts to exceed disposable income as costs rise – putting the squeeze on middle-class Albertans.
According to Statistics Canada, our country has the highest personal debt levels of all G7 countries. The amount of debt we owe is increasing faster than our earnings.
Canada’s average household debt to household disposal income ratio rose to 184.5% in the first quarter of 2023. In other words, Canadians owe $1.85 for every $1 of disposable income. (This number is skewed by BC and Ontario, which are amid a housing affordability crisis.)
Alberta sits third on the list with a ratio of 170% (we owe $1.70 for every $1 of disposable income).
Here’s how that debt breaks down:
Prior to (and during) the pandemic, many Canadians moved into new and larger homes. At the time, many opted for variable-rate mortgages, not anticipating the series of sudden and significant rate increases from the Bank of Canada.
As interest rates have climbed, these homeowners have seen monthly payments take off – turning household budgets upside down and dramatically cutting into disposable income.
Add higher utility, fuel and food costs, and many Albertans are finding their finances are being pushed to the breaking point. In fact, a recent study revealed that 60% of Canadians believe they will be in trouble if interest rates increase. Life is simply becoming unaffordable due to rising costs.
As a result, many Albertan’s are having to rethink things they once took for granted (like being a two-car household) in order to cut costs.
One sign that inflation is taking its toll on middle-class and higher-income Albertans is the increase in Consumer Proposals filed in this province.
According to a CBC News business report, 11,768 people filed insolvency paperwork in Alberta in March. Of that, 9,337 Albertans filed consumer proposals. Meanwhile, the number of bankruptcy filings dropped.
This is telling because Consumer Proposals tend to be the preferred insolvency option for those with unsecured assets to protect. Unsecured assets included vehicles or household items that are paid off (such as RVs, ATVs and snowmobiles, furniture and home electronics), investments and more.
As non-discretionary spending starts to eat up more and more of our paychecks, middle-class Albertans are taking difficult but necessary steps to rein in spending. For example, cutting back on vacations, postponing renovations or holding off on big-ticket purchases (like a new vehicle or appliance).
If you do find yourself with a little extra money at the end of the month, I’d encourage you to pay off credit card debt or loans. Any money you free up could then be put towards your mortgage or savings. Banks will often allow you to make a lump-sum payment or increase your monthly payments so you can pay it off sooner.
The good news is that there may be relief on the horizon after ten interest rate increases in the past 18 months.
In a recent interview on The Current, Randall Bartlett, Senior Director of Economics with Desjardins Group, said they predict interest rates will start coming down by the first half of 2024. He cautions that this is contingent on “inflation trending lower on a sustained basis.”
If you find yourself in a position where you can no longer cover your debts, talk to a Licensed Insolvency Trustee and ask how a Consumer Proposal can provide relief in these challenging financial times.
Barry Nykyforuk is a Licensed Insolvency Trustee and President/Owner of BNA Debt Solutions, which serves clients across Alberta and the Northwest Territories.