Covid-19's Impact on Debt in Canada

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The Financial Implications of Covid-19

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-How Covid-19 is affecting household debt
-How Covid-19 is affecting the food industry
-How Covid-19 is affecting the housing market
-Options for Canadian's needing help

It's been just over a year since Covid-19 hit and the world changed. But just because we’ve made progress in maintaining our Covid-19 numbers, doesn’t mean we’re done feeling the massive financial effects Covid-19 has left us with. It can be said with certainty that Covid-19 has affected every single Canadian financially. In a study led by GreedyRates, it was noted that as of August 2020, Canada had only recouped 55% of job losses from the initial Covid wave, this does not include the second wave or any future waves we may have. In this article, we’re going to break down how Covid-19 has impacted Canadian’s financially, whether it’s their spending habits, household debt, or the inability to live in a certain city.

How Covid is affecting Household debt

For decades, Canada has been an example globally for economic stability, but unbeknownst to many, in the past decade, Canadian’s have record-setting rates of household debt. So as Canadians are ever-increasing their household debt, the costs of servicing that debt are increasing leaving many Canadians in vulnerable financial situations. What many Canadians who are struggling to pay off their debts don’t know is that they’re better off trying to consolidate their debts using a company like Debt Refresh, then fail to pay back their debt in full.  According to this study, the key measure of household debt to disposable income in Canada is now more than 155% compared to the 150% it was in 2010 after the massive global economic correction. This is forcing more and more Canadians to decide on whether they want to stay afloat with their debts or continue to add to their savings and pay for necessities such as housing and education. On top of this, the housing market in Canada is quickly increasing so the financial strain on Canadian’s is at an all-time high. 

man putting for sale sign in front of house

Two ugly trends we’re seeing

The Greedyrates study has shown two alarming trends that Canadians are partaking in. First, Canadians are using and relying more and more on Household Equity Lines of Credit (HELOCs). According to the Bank of Canada, over the past decade, the main factor in the increased amount of household debt is attributed to home equity extraction. As of 2020, the amount Canadians owe in household debt is at a staggering amount of $268 billion. 

Secondly, the insolvency rate in Canada is increasingly getting closer to the rate during the 2008-2009 economic decline. During that decline, almost 160,000 Canadians filed for insolvency. That number decreased steadily in the years after as the global economy reassembled, but as of 2019, 127,000 Canadians once again filed for insolvency. Many Canadians are finding they can’t afford to keep up with the costs of everyday life with their current salaries. 

group of friends walking with masks on

How will Covid affect these trends?

Covid will undoubtedly have a significant and lasting effect on both of these trends as we’re hit with more waves of Covid. The unfortunate reality is that businesses will continue to close and jobs will continually be lost. This will leave Canadians who are already struggling to stay afloat with their debts in very difficult situations if they are to lose their income. Any Canadian’s that are failing or just barely paying off their debts should consider getting their debts consolidated. In brighter news, we’re seeing that Canadians have been more successful in paying off their personal debt, meaning credit cards and lines of credit, despite Covid-19. In January 2020, credit card balances for Canadians exceeded $100 billion, whereas in July 2020 that number had decreased to $89 billion. This improvement in debt can be attributed to the government’s financial aid programs, but as the government slows down these programs we may see an increase once again. The other factor that this decrease can be attributed to is Canadian’s have cut down on their spending due to the uncertainty of continued income. 

Food Industry Trends

Food prices in Canada, whether it be restaurant food or food from a grocery store are increasing significantly. The Canadian Food Price Report provides statistics and projections on the prices of food for the year ahead. In 2020, the Canadian Food Price Report studied the trends of the past decade. The results were shocking as in 2010 the average family spent $5,588 on groceries compared to 2020 where the average amount spent on food was $12,667. One of the main trends we’re seeing today is the increase in prepared meals. Many Canadians report they are short on time so they resort to having their meals delivered, saving them the time it would take to go to the grocery store. According to the marketing research company the NDP Group, since 2014 the meal kit industry has more than doubled. The last trend we’ve seen over the past decade is the amount people are spending going out to restaurants. According to this study, from 2011 to 2017 Canadians on average are spending $400 more a year eating out. In 2017, Canadians spent $2600 in total on eating out at restaurants. 

woman walking around in grocery store

How Covid is affecting the food industry

Covid-19 has and will continue to dramatically affect the food industry in Canada. First of all, food prices are constantly increasing as many of the supply chains we get our food from having slowed down the production process as they’re forced to take more Covid precautions. For example, meat cost went up 7.8% from May 2019 to May 2020. Secondly, since Covid, it’s estimated that the money spent on restaurants has been nearly cut in half. Despite the year over year increases of people spending money out to eat, lockdowns and safety precautions have put a pause on the restaurant industry. Researchers predict that when Canadians do decide to eat out they typically flock to the cheaper options and usually do delivery rather than dine-in. Lastly, the meal kit industry has increased substantially as fewer Canadians want to spend time at the grocery store and instead have their meal kits delivered to their door. The assumption is that too many families are already dealing with the stress of taking care of their kids at home, managing work, and avoiding public places as much as possible. 

Housing market trends 

The housing market in Canada has been on the up for the past 30 years, but particularly in the last decade. As the market for houses increases, the economic divide between home renters and homeowners also increases. According to this study, the average cost of shelter in Canada went up from 19.8% in 2009 to 29.7% in 2017. The big Canadian cities like Toronto and Vancouver saw the most inflation while Ottawa and Victoria are rapidly increasing as well. As finding housing in these hot spot cities, many families are being forced to move to smaller more affordable towns. From 2018 to 2019, Toronto, Montreal, and Vancouver saw 76,000 people leave to move to less populated areas due to the financial strain that living in these cities put on them.

graph showing an increase

How Covid is affecting the housing market

When Covid hit Canada initially, many experts felt that housing prices in these cities would decrease. But 9 months later, the housing market in Canada continues to increase steadily. So now, with so many Canadian’s losing their jobs, buying a house is even harder. For many new homeowners, maintaining their mortgage has been a stress-filled battle. Contrary to the buying market, the renting market is beginning to become more affordable. This is due to the travel bans Canada has internationally as well as the reduction in travel from Canadian city to Canadian city. Landlords who would usually have their houses or apartments listed for short-term rentals on sites like Airbnb are now renting out their properties for longer durations which is driving down the price of rentals in these major Canadian cities. Lastly, as we see so many companies successfully operating by working remotely, people are starting to realize the office is not necessarily conducive to productivity. Therefore, even after the pandemic is over and people work back in the office, many companies will instill remote work as a full-time option. If that is an option, many people living in Toronto will likely move to smaller cities where housing is more affordable while they maintain the jobs they originally worked for in the big cities.

Options for Canadians

Contrary to popular belief, if you’re overwhelmed with debt, you’re better off using a debt reduction service rather than struggling to pay your minimum payments. 

At the time of this article, 47% of Canadians are currently struggling with debt. Debt reduction is an important solution because it actually helps you rebuild your credit faster than trying to maintain your payments on your current debt. For example, if a person in debt only makes their minimum payment they are not reducing their principal. This means that the debt can exist indefinitely, or worse, continue to build. Paying the minimum also doesn’t improve their credit score and therefore doesn’t allow them to improve their refinance options. The minimum payment approach that many Canadians use just keeps them in a vicious cycle. However, entering into a debt reduction service such as Debt Refresh, allows you to reduce your total debt. Our trustees negotiate with your creditors on your behalf and reduce your debt and your monthly payment into an amount that you can afford. Generally, our trustees are able to reduce your total debt by 70 to 80%. You are then entered into a program that allows you to pay off the remaining 20-30% of your debt in a matter of years. 

mother and daughter cuddling

Why would lenders allow you to reduce your debt?

As more and more Canadians claim bankruptcy, lenders and creditors know it is in their best interest to work with Debt Reduction services such as Debt Refresh. By working with our trustees and negotiating your total debt, the lenders will still receive 20 to 30% of the debt owed to them as opposed to receiving nothing. 

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