For seven years, this country has bathed in the lowest interest rates ever.
And while last week’s slight increase by the Bank of Canada — its overnight rate went from 0.5 to 0.75 — will impact or even hurt some people, it could certainly be worse.
Having grown up in the 1970s and 80s, sure things such as food, housing, vehicles or just about anything you could think of were far cheaper and society was somewhat less throwaway than today.
However, it was also more likely that people were spending nearly all of their take-home pay on their mortgage and car payments.
Interest rates back then were as high as 21 per cent on mortgages and cars, vs the basement level three to four per cent a lot of homeowners are seeing now. Translated, that means one would own a $72,000 home in 1982 or one worth about $275,000 today for the same $1,300 monthly payment, while the average family income was just less than $53,000 as compared to about double that in 2015.
Granted, the comparison is slightly off-base since back in 1982 a family of at least four could live in a new home with a garage and a nice yard in the front and back for that price. Whereas these days, one would be hard pressed to find anything new at that price unless you’re in a condo.
On the household front back then, most people were just getting by on the basic necessities. For example, there was a two year span we went without a phone (imagine a home with a teenager and no phone nowadays) because of the need to simply survive.
Thank goodness for being able to get food from a garden, preserves and doing your own baking for just pennies (that’s those copper coins no one wants anymore).
On the flip side of that though, it was also more lucrative for the 10 to 14 year-olds then to find something that paid decent money. There were years where kids made upwards of $5,000 officiating hockey in one season. That could be done now, but every cent handed out by sports organizations is tracked and it won’t be long before it would all be taxed regardless of how old the person is.
However, it was also much harder to get money back in the day. In 1982, consumer housing debt was in the neighbourhood of $30 billion. As of two years ago, that figure neared the $1 trillion mark — more than 33 times higher than three decades earlier.
And therein lies the area of greatest concern, high valued homes being paid off by individuals whose incomes are likely to not rise and have over-leveraged themselves with debt to the point that a modest interest rate hike would be devastating.
Okay, for the financially challenged, that means homeowners are in greater jeopardy of not being able to pay off the mortgage and losing those homes if rates climb too high.
Today, the average Canadian has a debt load ratio of 163 per cent when compared to disposable income, so any change to interest rates is a hit to the wallet. Back in the day, Canadians had more money than debt, with ratios ranging from 87 to 95 per cent.
For that reason alone, one should be wary of the slight rise in interest rates since it will now cost more and take more time to keep what you already have.
Although, I believe we all have to beware of spending what we don’t have on something we simply want at the possible expense of losing it all.
But that is…just an observation.