Albertans and their debt hangover
How prepared are debt-laden Albertans for a long slump in oil prices?
A passion for new cars and a generous spirit sunk Albertan D'Arcy George into debt.
The Lethbridge education assistant took a second job at Costco to help pay off the $70,000 in debt he accumulated, but he still struggled with a bank account constantly in overdraft.
“I was car crazy. I really like new cars. I kept on trading and trading, and eventually it caught up to me,” George said. “And I was buying a lot of gifts for people and getting more and more into debt.”
People are making good money. Unfortunately, with that comes the overspending and people in Alberta seem to like their toys- Alberto Rosati, estate administrator
His experience isn't unique.
A peek into the bank accounts of Albertans show many are carrying large debts, a hangover from years of optimism and confidence in the provincial economy. That could be a problem during an extended oil slump.
“We’ve had boom times here and people are making good money. Unfortunately, with that comes the overspending and people in Alberta seem to like their toys,” said Alberto Rosati, an estate administrator who deals with bankruptcy filings.
How much debt?
An abundance of confidence isn’t surprising in a province where the average hourly wage is $28.14. Combine that with low interest rates and expensive housing, and for many people that can mean high levels of debt.
BMO’s annual debt report pegged average household debt in the province at $124,838 in 2014 (compared to a Canadian average of $76,140.) Among Albertans, half held credit card debt, 53 per cent had mortgages, and 17 per cent held student loans.
Equifax Canada reports that Calgarians ended 2014 with an average consumer debt of $28,263, the highest of the seven cities profiled, with Edmonton residents a close second at $26,305. Consumer debt does not include mortgages.
And a February Ipsos Reid poll for MNP Ltd., a personal debt consulting firm, suggests that 23 per cent of Albertans are technically insolvent, defined as the inability to pay debts as they come due, or having liabilities in excess of assets.
Working three jobs
George finally turned to Randy Kobbert, a MNP trustee, who helped him manage his money and recommended filing a consumer proposal, which allows a debtor to pay a creditor a percentage of the amount owed, extend the deadline for paying it off, or both.
This is an increasingly popular option in Alberta. The number of consumer proposals filed by Albertans spiked 58 per cent from December 2013 to December 2014, although fewer people filed for bankruptcy.
George took on a third job as a cleaner to pay off his debt. He now works every day of the week, often 16 hours a day. He drives a used car and is making payments on a home he owns with a relative.
“I feel more confident that I can save money and know how to handle money,” he said. “I always have a balance of $8,000 in the bank and I get worried if I have less.”
Bonuses paying off day-to-day expenses
Bruce Alger, a licensed bankruptcy trustee in Calgary with Grant Thornton, expects to see an increase in clients in six months, once people have burned off any savings and employment insurance.
“There will be people who had no savings, don’t have a lot of assets, were marginalized before and what they need is an uptick in the economy, and instead they get a downturn and then they are in to see us,” said Alger.
But some Albertans who appear well off, also might not be able to handle a long slump.
“If people are commission-based and they are not setting aside a chunk of their dough, there is a problem there. If people are in the oil and gas business using their bonuses and their stock options to pay for their day-to-day living expenses, there is a problem there,” Alger said.
Alger has seen many dips in oil prices over the decades, along with the ripple effect on industries outside the energy sector.
“I’ve seen four or five different dips and the pattern this time is really a lot similar to the mid-'80s,” he said. “We are so energy dependent in this province for everything, so the price of oil is externally controlled, it hits a dip and everybody hangs on for a while and corporations become increasingly fast at making cuts and making changes.”
Not 'overly concerned'
Sal Guatieri, senior economist with BMO, says household debt in Canada isn’t as worrying as usually portrayed in the media. However, he singled out Albertans as the most indebted, blaming rising housing prices and young people moving to the province for work.
"This year will test the finances of some Albertans, but if oil prices rebound partially, the blow will be cushioned," he said.
“Barring a severe recession as a result of a much sharper drop in oil prices, we aren’t overly concerned about the household debt situation in Alberta.”