Canadians cut back on big ticket items to reduce debt: PwC

Consumers heed Ottawa’s warnings; plan to delay purchases

TORONTO — Canadians are getting the message that their debt levels are too high and as a result they plan to spend less on big ticket items this year, according to a survey by PwC. In the name of debt reduction, most respondents are willing to put off the purchase of a new car, a new house and/or new electronics.

“Across the board, we are seeing a new desire by Canadians to cut back on major expenditures from our survey a year ago. Clearly, they are heeding the various warnings from the federal government and the Bank of Canada,” says John MacKinlay, Leader of PwC’s National Financial Services Consulting and Deals practice.

The top reasons cited for wanting to reduce debt were fear of not being able to pay off debt (47%), the economy (46%), followed by uncertainty in the financial markets (33%). Tempering this is a measure of optimism from Canadians about their job security and incomes, the report states. Overall, 76% of respondents feel their jobs are secure, while 21% believe their jobs are “at risk.”

“In general terms, Canadians are relatively comfortable with the future of the economy and their job prospects. They are also comfortable with their level of debt because of the equity created by high housing prices, the availability of funds from their banks, and low carrying costs due to the prolonged low interest rates” MacKinlay says. “However, as Canada has largely been spared the economic malaise of the US and Europe, many may not fully appreciate the tenuous nature of the global recovery, creating a false sense of security. Continued improvement in the economy will ultimately result in higher interest rates, putting pressure on borrowers. The only scenario where interest rates remain at current levels is in the event of a weaker economy which creates employment challenges for borrowers,” he says.

Acknowledging this dilemma and in response to Canada’s rising real estate markets, OSFI has issued new guidelines on mortgages and lines of credit: “major banks are already following the general principles and should be able to comply easily with additional requirements,” MacKinlay adds.

In every category, Canadians want to delay more big ticket purchases this year:

  • 69% will delay a new car purchase (vs 64% last year)
  • 62% will delay upgrading to a bigger house (vs 56% last year)
  • 61% will delay purchasing new electronics (vs. 59% last year)
  • 53% will delay entertainment expenses (vs 49% last year)
  • 49% will delay a vacation (vs 47% last year)

Surprisingly, 58% of all retired respondents also report carrying some debt, with 42% carrying more than $10,000. “For banks, this is an example where it’s so important to understand the individual lifestyle needs and characteristics of certain age groups. Baby Boomers never lived through a major depression like their parents and they’re not afraid to borrow to make major purchases,” says Diane Kazarian, National Financial Services Leader at PwC.

The survey also found that respondents expect Canadian banks to play a bigger role (85% of higher income and 74% of those with household income of less than $100K) in advising its customers about their debt limit and helping them stick to that limit. “There is an expectation of the banks to strengthen their relationships with clients and position themselves further as financial advisors,” says Andrew Smee, PwC’s Consumer Lending practice leader. “The challenge for bankers, given consumers’ comfort with their personal financial situation and the economy at large, is to help their customers make prudent choices around debt.”

The PwC survey was conducted by Leger Marketing in December 2011 and a total of 1,200 interviews were completed among Canadian adults. There were 603 respondents with an annual household income of over $100,000 (comparable to last year’s survey). This year, 597 respondents were added at lower income levels to supplement findings at this level. A probability sample of this size yields a maximum margin of error of +-4.o%, 19 times out of 20.

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