The Decibel - Here’s why millennials are drowning in debt

Episode Date: June 14, 2023

Canada’s household debt is really high. In fact, we outrank France, Italy, the UK and even the U.S. And while, the debt load is high for Canadians of every age group, one particular generation stands by owing over $600,000 on average.Rob Carrick is The Globe and Mail’s personal finance columnist. He’s on the show to explain why Canadians owe so much and how over-indebted Canadians should be thinking about their finances.Questions? Comments? Ideas? Email us at [e-mail]

Canada has some of the highest levels of household debt in the world. Even more than major economies like the US and the UK. That's according to the Canada Mortgage and Housing Corporation. And this isn't great for our economy. The Globe's personal finance columnist, Rob Carrick, recently dug into household debt with a survey, and he found that one generation in particular is carrying the worst financial burden. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Rob, thanks so much for joining me. Glad to do it. So in Canada, we have an average household debt of $1.83 for every dollar earned.

Can you just help me understand, what exactly does that mean? You know what, we need a way to sort of get a snapshot picture of how bad the debt problem is. And so we've latched on to this debt to disposable income ratio. It's kind of clumsy though. It doesn't really say what's happening with individuals. It just says that if we took all the debt and all the income, we'd have $1.83 of debt to every dollar of income, which is not good. I mean, we can at least get a picture that we're in sort of an overly indebted position. But I've always found that that's kind of an abstract number. And what does it mean've always found that that's kind of an abstract number. And what does it mean to me and the people I know and the readers of the Globe and Mail,

for example, what is their individual position? We don't really know in a figure like that, because it's just sort of an aggregate for the whole nation. Okay. And we're going to get into some of the details behind that. But let's just stick with this figure for a moment. So give me a sense of how high is that? Well, it's the highest ever in this country, give or take a few tiny percentage points. Canada used to be a country of very cautious borrowers. And then interest rates went down and consumerism ramped up and the internet came and social media came and we just borrowed more and more and more. It was affordable,

so we thought we could get away with it. Okay. And how does that compare to other countries? We are in the upper echelon. So something we rule out in Canada is getting in debt. We're not number one. Denmark, Sweden, Norway, the Netherlands, I think Australia is a little bit ahead of us. But we are well ahead of the other big industrialized countries. The United States is way lower than us. Germany, France, Japan, they're all lower than us. And that's interesting. It surprises me that the US is so much lower than us. Is there a reason why? Yeah, they kind of had a big debt blowout in the 08, 09 recession. The housing market there just crumbled. And a lot of people there paid off what they owed and became very, very cautious about adding new

debt. And so they sort of had this big shakeout. And in Canada, there's always been talk that, oh, you better watch out if you take on too much debt because we could have a big recession and then you'll be sorry. But we never really had that big recession. And we never really had that big economic setback that taught a lesson about overextending yourself on debt. So we had the pandemic, but there was a lot of government support. And things came back very quickly. And some people are still suffering, we have to acknowledge that because what's happened to their income and their jobs. But on the whole, the country came through the pandemic pretty well. I mean, people want to criticize the government for overpaying and doing too much, but the economy was supported,

it never crashed. And so here we are in a position where we're eagerly borrowing again. Okay, so let's get into this number a little bit now because this is the high level, but we're going to drill down here, Rob. We usually don't know how this number breaks down across generations because we just don't have a lot of data on that. But Rob, you actually did do a survey to find that out. The survey had over like 6,100 responses, and it found that there's a certain age group that actually carries the most household debt. So can you tell me what that survey found?

You're right. It was 6,000 plus people, which is a lot for these kinds of surveys. And what it allowed me to do was to find out what's behind that $1.83 in debt to a dollar of income number, and who owes the most, which generations are the most loaded down in debt to a dollar of income number. And who owes the most? Which generations are the most loaded down in debt? And the star generation for debt is millennials. Millennials for their age group are carrying an incredible amount of debt. Now, they don't owe quite as much as the 40 to 49-year-olds. 40 to 49-year-olds had about $647,000 in debt,

whereas the millennials had an average $644,000. And that really jumps out at me. I would consider, even though they're a little bit behind the 40 to 49-year-olds, I consider millennials, the 30 to 39-year-olds, the most indebted, carrying the most debt, and probably having the most trouble carrying it. Because if you're 40 to 49, you're further along in your career, you're earning a little bit more. Millennials are more at the beginning stage of their career. And so I think they have the heaviest load. Yeah. And I guess to clarify, if you're in your early 40s, you are an elder millennial still, right? Because I think the range stretches from people 27 to age 42.

So the 30s is definitely the majority of the group, but it's a little bit on either end too. True. You know what? We have this idea of millennials are all young people, just fresh graduates, but actually they're kind of getting on a bit and yes, they're getting into, they are getting into their forties. Yeah. And so, okay. So how does that compare to other age groups though, in terms of how much debt they're actually carrying? Okay. So the 40 to 49 year olds, as I mentioned, are a little ahead of them. And then once you get to 50, 59, it starts to drop off. Their average rate was about 566,000. And then 60 to 69 year olds had 435,000 on average, which is quite a lot when you think about it.

I would say a lot of them are people who haven't paid off their mortgage. That would probably explain that. Here's another interesting tidbit, 18 to 29 year olds. So here we can veer into Gen Z. They have an average debt load of 562,000. So that tells us that a lot of them have been getting into the housing market. And their reward is owing, you know, well more than half a million dollars on average. That's a lot of money to owe. I mean, at any stage in life, but especially when you're that young too. So let's get into this, Rob. Why is millennial debt, and in particular, elder millennial debt, like when you're getting into your early 40s, late 30s there, why is that debt load so high? I would say it's the housing market. You know, millennials have been motivated like nobody's business to get into the housing market. You know, there's all this talk about their despair about, I'll never get into the housing

market and housing prices are too high. They really want to buy nevertheless. And they have been pushing themselves and they've been using parental help where available and getting themselves into the housing market. And when you are buying at a peak, like housing's been at in the past five, 10 years, your mortgage is going to be big. And that explains why these millennials

have such a high amount of debt overall and mortgage debt as well. In your early years, you've barely paid off any principal on your. In your early years, you've barely paid off any principal on your mortgage. And that explains why you've got a giant mortgage and you maybe have other forms of debt too that go into this total average that we've been talking about. And give us an example. What are some of the other forms of debt that you often hear about? Well, credit card debt is definitely on the list. So I actually looked into credit card debt. And

what I found was that the average debt for millennials who have a balance on their credit card is about $6,200. That's not the highest. 50 to 59 year olds have the highest overall credit card debt at $6,900. But millennials have a significant amount of credit card debt. There's just no way you can gloss over this. I realize a minority percentage of people with credit cards carry a debt. There's just no way you can gloss over this. I realize a minority percentage of people with credit cards carry a debt. Let's acknowledge that. Of the ones who do, $6,000 is a very heavy debt for someone to 30 to 39 to carry, especially when the interest rates are about 20%. So there's that part of your debt. And then student debt, 30 to 39-year-olds have an

average of $26,000 in student debt. I'm thinking that a lot of them may have gone on to a master's degree and professional degrees. And if that's the case, they may have, that may be affordable for them because they're going to have a better income. Yeah. And so you gave us the amount for student debt there and credit card debt. What about the mortgage amount there, Rob? Like how much money are we specifically talking usually for mortgages in that range? So specifically for mortgages in the 30 to 39 year range, it's about a flat half a million dollars on average. So that would be expensive Toronto houses mixed with cheaper houses in rural places and smaller towns and cities. The next highest debt group is Gen Z with $475,000

in mortgage debt. So that reflects that, you know, gens that are early buyers, they haven't got into the housing market as much as millennials, so they don't know quite as much, but they've got their hands full regardless. And then every generation after that, the average amount of mortgage debt goes down, down, down, but it never goes to zero. Even the 70 plus crowd had an average of $217,000 in mortgage. So your grandparents may have a mortgage. Wow. Okay. So people are in debt here is what I'm hearing. Let's focus again on this millennial group here, Rob, because in some ways, I don't know if it really should surprise us that this group of people in their 30s, early 40s have a significant amount of debt because, I mean,

this is an age where you're making some really big purchases. You might get a car, a house, you might have kids, you need to pay for daycare, you're making some really big purchases. You might get a car, a house. You might have kids. You need to pay for daycare. You might have loans to go back to school. Like, wouldn't we expect to see this group of people have the most debt? For sure. I mean, this is the age when you're doing your power buying in life, car, house, furniture, et cetera, et cetera.

But I just think the extent of the debt is mind-blowing. It shocks me that 30 to 39-year-olds owe an average $644,000. It's just a staggering number. I think if you went to them and you said, did you know that you owe an average $644,000 if you had a crowd of millennials, their jaws would drop. I don't even think they understand how much they owe. We'll be right back. Rob, I know you bought your first house in 1992.

So can you just take us back to that time? What was that like for you? You know, I was talking to my wife recently about this because we have two sons in their late 20s. And they're not in the housing market and don't really have much optimism that they will be anytime soon we have lots of nieces and nephews and I write about this all the time so I say am I wrong or was it pretty easy for us to buy our first house and she said yeah it was kind of easy it was you know what we we were living in a rental nice rental on Queen Street in Toronto in the beaches and we had some people lived underneath us who thought I had a heavy tread and were complaining about the noise I was making. And I was working shifts for as a young journalist coming in and out at all hours. And they kept saying, why are you stomping around in the middle

of the night? We thought, well, it's a good time maybe to buy a house. And we had people telling us, oh, owning a house is so much better. So we thought, let's buy a house. So 12 months later, we had a house. My parents did help us with a little bit of money. It wasn't enough to for the whole down payment, we had to pull money out of our RSPs. And we power save for a while. And it was no great stretch to build up a 10% down payment, we bought a house that cost a little less than $200,000. Wow. Can I ask what was what was your combined income at the time to kind of allow you to afford it was about it was about seventy thousand dollars combined income combined income my wife and i you know we were both like plus or minus the median i actually looked up what the median was back then and we were right around the medium give or take and so the house was three times our income now today

if you adjusted our income for inflation up to 2023 levels and you went and you looked at the average toronto house price it's 8.5 times income as opposed to three times. And therein lies the story of expensive housing. Prices zoomed higher and incomes crept higher. Okay, yeah, that actually really illustrates that point of just that difference that people these days have to make up, but that wasn't the case before. Rob, you mentioned you have kids that are in their 20s, and you've got nieces and nephews. So what are they telling you about these days and what things are like for them? You know, when I talk about housing with them, I get a big shrug.

What is that you're talking about? Homeownership? Don't get it. Don't see it happening anytime soon. Now, they're still young and, you know, like lots of things can happen. Now, our boys have, you know, they're employed. They live on their own. They've got savings and all that stuff. But that sort of accessibility of housing

to even people who are in that early phase of their career, it's not there right now. It was for me and my wife, most definitely. We had our first house, I was 30. I think my wife was 29. I have a 28 year old son, he is nowhere near as buying a house as we were when we were that age. Yeah. Wow. Okay. So we've established that millennials have a lot of debt, but I want to ask you, is that inherently bad? Like is all debt bad debt? As long as I've been writing about personal finance, people have been clinging to this concept of good debt. And good debt means I borrow to buy an asset that will appreciate in price. And so I'll be rewarded for all the interest I'm paying by having an asset that is growing, growing, growing.

And I have some sympathy for that. I think there's some logic to that. A house can be good debt. University or college education can be good debt too, because you go into debt, you take this program, you emerge into the workforce, and you have a chance to have a better career with higher earnings because of your education that you borrowed to get. So I'm sympathetic to that. But I think that you can't just give housing carte blanche as good debt, because there's a point where it's too much debt, and it's strangling your finances, and you run the risk of having a house and not much else. No savings for emergencies, no retirement savings, no ability to have some flexibility and fun in your life without going into debt.

Okay. So, I mean, it seems like millennials are kind of making the same decisions that most people do at that stage in life, but the results are still not turning out well for them. Like, how is that possible? If they're doing all the right things, like, why are the results so bad? No generation has had to pay as high a price to get in as millennials. Now, I know boomers in the 1980s had astronomically high interest rates, but house prices were very affordable in relation to incomes. That's not where we are today. I don't want to be too negative about the debt that millennials have because I do think that 10, 20, 30 years from now, they're going to have a house that's appreciated a lot in value. They're going to have it paid off. They're going to have some retirement

savings. I think things will be all right for them. I just think they're going to have a more stressful ownership experience than other generations did. Well, let's talk about, I guess, some of the effects of having this kind of debt, Rob. Let's start with the big picture. Like, what are the long-term effects of high household debt on our, Rob. Let's start with the big picture. What are the long-term effects of high household debt on our countries, on Canada's future economic growth and stability? It makes us a little bit vulnerable to severe downturns, recessions, because people don't have the savings to keep their debts going, to pay their mortgage and that sort of thing. So if there was a big, sharp recession, which nobody is actually

forecasting right now, but you never know, I think a lot of millennials could be forced into insolvency. I think some could have to restructure their debts. It could get tense. I think a lot of them will be fine, but there'll be internal household stress. How are we going to do that? You know, the sacrifices that they're going to make are going to cause stress between partners and in families. Okay. You mentioned high household stress. So let's just touch on the personal level here for a moment. If you're carrying this level of debt for a long time, I guess, what are those long-term effects for you and your family? I think it creates a lot of money trauma in a way. It creates this constant feeling that we're under assault by high interest rates and high

payments and the amount we owe, and we're always on the defensive. We're always making sacrifices. Creates negative vibes about money. And I think that can have a long tail. I don't want to over-dramatize and overplay the amount of stress millennials are on right now because I think we're at a peak right now, and I do believe it's going to get better. We're at a point now where mortgage rates are extremely high, and they've trickled down into the payments people are making. Over the next several years, mortgage rates are going to come

down. They will not stay at current highs, and people are going to find that their mortgage payments are coming back down. We're close to the peak, and the other side of the mountain is in sight. Also, a lot of them got to be bummed about the fact that they've got these high mortgage payments and their houses are losing value. If you bought in early 2021 or 2022, your house could be worth now a fair bit less than you paid. Prices are going to come back up again. So you're going to end up seeing your house value coming up again, your mortgage payments

coming down. And I think you'll have a little bit more equilibrium than you may now. And hopefully the cost of groceries and all the rest that inflation's brought us will ease off as well. Rob, I got to say, this is sounding pretty bleak for millennials here. I mean, really, this generation is facing some really difficult hurdles when it comes to the housing market, student loan debts, interest rates. What's your advice on how millennials can actually manage their money and debt in this climate? Well, I think the life is long narrative is a big help. You know, you're going to have, you are not living your parents' life. You don't have to do everything in your 20s and be all

settled out in your house by your 30s, use the time that longer life expectancy is giving you. You know what? I always think of your 20s as a decade to get yourself sorted in the workplace, in your career. The 30s can be your decade to get yourself sorted in terms of finding a partner, finding a place to live, saving for a home down payment. And if it has to be in your late 30s or early 40s, that is a-okay. But we have this sort of rush, rush situation now where everybody's got to do things quicker, even though we're living longer. And I'll back that up by looking at the amount of mortgage debt that 18 to 29-year-olds have, $475,000. You don't need to own a house in your 20s. If you give yourself

the benefit of time, it takes the pressure off and then you can sort of look at today's stresses and go, yes, but time will help me deal with this. It's maybe a little bit hopeful at the end, actually. I appreciate that, Rob. Thank you so much for taking the time to speak with me. Glad to do it. That's it for today. I'm Maenika Raman-Wells. Special thanks to former intern Tracy Thomas. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening and I'll talk to you tomorrow.