For years, workers across Canada have been among the most heavily-indebted on the planet. Now, it appears that rising prices, interest rate hikes, and a likely recession have collided to push more and more into bankruptcy.
The ‘tip of the iceberg’
Across 2022, 100,184 Canadians filed for insolvency, up 11.2 per cent from 90,092 in 2021. Already, in Jan. 2023, another 9,066 filed for insolvency, up 33 per cent from one year earlier—the largest year-over-year insolvency increase in almost 30 years.
According to recent polls, one in six Canadians say they’re likely to default on a major loan or mortgage in the next 60 days. Forty-six per cent, meanwhile, say they are just $200 away from being “unable to meet their financial obligations.”
Across the system, experts are warning that this is just the tip of the iceberg.
While insolvencies fell during the worst of the COVID-19 pandemic, the final evaporation of emergency transfers, rising prices, and interest shocks have exposed the weaknesses underlying Canada’s economy. The Toronto Star notes that this could be the “perfect storm.”
The ‘perfect storm’
Total household debt in Canada now sits at 180.5 per cent of income. By comparison, U.S. household debt stood at just 129.4 per cent of disposable income in the lead up to 2008.
Where did this debt come from? Canada’s corporate media has taken to blaming a “change” in “financial attitudes” and “expectations” among ordinary workers. Media outlets eagerly offer “financial planning advice” to indebted working class families—“scouring coupons, working extra jobs, turning off your heating, growing your own lettuce and adopting a “financial diet.” Yet, for some reason, workers and their families just can’t seem to “live within their means.”
In reality, however, workers are not in debt because they “expect” too much.
Andre Bolduc of the Canadian Association of Insolvency and Restructuring Professionals told the Toronto Star that most of those in debt “turn to credit cards or lines of credit to bridge the gaps in their household budgets—to pay for groceries and essentials.” An earlier report from Meryll Lynch noted that the average Canadian household regularly faces a choice between debt service and necessities.
The real reason for the credit crisis is that for decades, wages have stagnated or fallen for most working class people. Meanwhile, the cost of housing and other essentials—owing to speculation, bubbles, price gouging, and changes in the money supply—has risen. Credit, in this context, has helped extend working class purchasing power beyond its normal limits.
In every major Canadian city, the cost of living is squeezing median wages. Home ownership, owing to speculation and debt-fuelled bidding wars, is out of reach for most. And this crunch has allowed landlords to gouge tenants. With average annual rent hikes of up to 10 per cent increasingly becoming the norm, average housing costs are eating up a staggering 67 per cent of average annual incomes. This, predictably, leaves little but credit to cover other expenses.
A recent poll by ACORN Toronto, for example, found that 83 per cent of low income tenants use high interest loans—of up to 500 per cent—to cover their food, rent, and groceries.
More broadly, polls have found that 87 per cent of younger workers, who are typically worse-paid and underemployed, have over $10,000 in credit card debt. They are, unsurprisingly, 1.7 times more likely to file for insolvency than older workers—especially amid runaway inflation. For older workers, meanwhile, auto loans account for an increasing share of insolvencies amid spiking fuel and car prices.
Moreover, with inflation exceeding six per cent last year but planned wage increases only hitting 3.8 per cent, on top of rent hikes, it is no surprise that many workers failed to meet their debt payments.
Interest rate shocks
In 2020 and 2021, the Trudeau government launched a massive corporate bailout program of money printing and deficit financing. This massively increased the money supply, shortly before supply chain crises and war led to shortages of basic staples, fuelling an inflation crisis.
Inflation obviously harms workers and the poor, but it also increases “input costs,” and reduces the value of money for the capitalists. In the interests of the latter, the Bank of Canada has sought to hike its interest rates to restrict the supply of money. They know that this will dampen investment and growth, but as one Scotiabank economist explained: “They’re perfectly willing to court recession.”
The rate hikes have massively increased the cost of borrowing for both prospective and current borrowers. In particular, this means an immediate interest rate shock for the majority of borrowers who are locked into variable-rate mortgages. A first-time buyer who took out a mortgage in May could suddenly see the interest on their loan double in one month and see their monthly payments increase by hundreds of dollars.
Rather uncontroversially, Bolduc said, “In the higher interest rate environment, it is harder to pay off these debts.” For many, it will mean (and perhaps already has meant) insolvency or bankruptcy, further destabilizing an already unstable financial system.
Canada’s deflating housing bubble and the coming recession
Just before the pandemic, the IMF warned regulators that “Canadian households are much more leveraged than in the past,” which has helped to inflate home prices beyond all reasonable limits. All told, the IMF warned, Canada’s debt-fueled house prices are “overvalued,” by up to 50 per cent and extremely vulnerable to “shocks to income, unemployment, interest rates, or house prices correction.”
During the pandemic, this “correction,” was delayed, but it was bound to occur at some point. With interest rates and other expenses rising, The Financial Post anticipates a 40 per cent drop in house prices, after last month’s 40 per cent drop in home sales. Overall, it appears that a general “downturn in real estate” is a strong possibility. “If all your assets are in real estate,” Richardson Wealth advisor Diana Orlic warned prospective speculators, and “people aren’t paying,” expect “trouble.”
Elsewhere, changing house prices have already shaken the Toronto Stock Exchange. Led by increased “land value,” the Bank of Canada notes, from 2008-22 especially, capital drifted away from productive investment and into housing speculation, housing debt, and rental housing. This is marked chiefly by the growth of Real Estate and Rental and Leasing (RERL) firms, “high-yield debt markets,” and the mortgage-backed securities made famous by the 2008 meltdown.
Just before the pandemic, Statistics Canada found, $8.752 trillion or 76 per cent of Canada’s $11 trillion national wealth and one fifth of its GDP was caught up in real estate. Aside from residential property traders like FirstService and the major lenders, pension funds, asset managers like Brookfield and Colliers, and the portfolios managed by non-real estate firms like General Motors and CANFOR have linked their fate to the real estate boom. In the event of a house price collapse, they will be in a significantly worse financial position.
During the boom, housing boosted Canada’s ruling class generally. Now, it risks dragging them down generally. Already, real estate firms like Romspen Investment Corp (assets $2.8-billion,) Starlight Group Property Holdings Inc. ($25-billion,) and Blackstone Inc. ($69-billion) have announced plans to delay payouts to investors. But more will surely follow.
Additionally, any substantial drop in house prices is sure to devastate the construction sector which, during the boom, came to account for up to nine per cent of GDP. Should this downturn occur, moreover, it will likely mean layoffs for thousands of workers who will stop spending and stop servicing their debts.
But the problems could extend further still. As we’ve explained before, while these speculators have made their steady profits from the housing boom, some sections of the petit-bourgeoisie have seen their wealth rise as well. Ever-inflating house prices have allowed them to extend their spending on the basis of their perceived asset value. In the process, these new homeowners have been able to purchase cars and other key items to boost Canada’s productive sectors.
But this is quickly changing. Should the anticipated 40 per cent correction occur, according to the Financial Post, while merely lowering house prices to their historic average, it would also “chop” roughly $1 trillion in home equity from the Canadian economy. This will be more than enough to drag down Canada’s GDP. In all likelihood, it will also spur bankruptcies elsewhere.
The crisis this time
In their most-recent quarterly reports, all of Canada’s big six banks reported that they are looking to put “money aside to handle credit losses.” Securities regulators too have launched a daily monitoring system—to track banks’ liquidity ratios, effectively assessing how overleveraged they are—ahead of an anticipated recession.
Already, RBC has predicted a slump by the end of 2023. “No parts of the country will be sheltered from the stiffer economic headwinds,” RBC’s report said, as oil and other export prices, while rising, are unlikely to generate enough growth to avert a general economic downturn.
But despite multiple warnings, few safeguards have been taken.
While Canada’s largest mortgage lenders are insured by the CMHC, regulators have been warning for years about the rapid growth of Canada’s uninsured, high-interest “shadow banking sector.” Despite numerous warnings, however, this sector is likely to account for at least $20 billion or 10.6 per cent of the mortgage market.
Further, while Canada’s 80 main financial institutions are insured by the Canada Deposit Insurance Corporation, covering up to $1 trillion in assets, experts are warning that it has alarming gaps as well. As the Financial Post recently warned, the amount that depositors can get back has been capped at $100,000 per category of deposit, per financial institution since 2005—about half the limit covered by the U.S. Federal Deposit Insurance Corp. As the Post observed, the insurance plan is financed by premiums and, while a higher rate would be more secure, Bay Street’s major lenders “don’t want to pay.”
It is clear that the credit system is turning from a buoy into an anchor for the capitalists. Yet, even in the face of catastrophe, they refuse to take any substantial precautions if they even pose the risk of compromising speculative profits.
While much remains unclear about the coming crisis, past behaviour is, by most standards, the best indicator of future behaviour. In the last capitalist crisis, the capitalists “recovered,” at the expense of the working class—with bailouts for them and real wage and job cuts for us.
Expropriate housing and the banks
Capitalism means private ownership of the banks, of housing, of the food supply, and the other means of life. It leaves the capitalist class free to charge extortionate rents, house prices, food prices and interest rates at one end, while cutting wages and jobs, and overexerting the working class to produce goods that cannot sell on the other. Crisis is an inherent feature of capitalism for this reason. Left up to the capitalists, in turn, the present bankruptcy crisis will be “solved,” by bailing out Canada’s banks, lenders, and speculators, while working class incomes fall or stagnate, setting the stage for another crisis.
As Marx and Engels explained in the Communist Manifesto, the capitalists have no way of “recovering” from the crises of their system except by “paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.”
A socialist plan of production, by contrast, would have no use for housing speculators, for an over-indebted mass of workers, or for a multi-trillion dollar housing bubble. By seizing the banks, the working class will have the tools to allocate resources for human need rather than private greed in a democratically planned economy. Taking control of the automotive, transportation, and food sectors would allow the working class to eliminate scarcity and supply chain irrationalities, massively cheapening the cost of living for all. That would mean workers would no longer have to put themselves deep into debt, especially high-interest debt, to purchase the essential goods which they alone produce.
Under capitalism, housing is made to serve investors and speculators first, but a socialist system would have no need for the current housing market’s massive increases in rents and prices. These increases, despite what landlord lobbyists say, have little to do with “risk,” or the cost of maintenance. Rather it reflects what the Bank of Canada calls “land value,” or what Marx called “ground rent,”—the capitalist’s legal monopoly over a portion of the earth. Socialism would make the earth the common property of the whole working class, in all meanings of the phrase, and provide housing for need rather than for profit.
In the meantime, one thing is clear. This is just the beginning of the bankruptcy crisis.
While insolvencies have massively increased, the full impact of the interest rates has not yet been felt. When the bust does come, we can be sure that the capitalists will do all they can to make working class families pay for their crisis with layoffs, wage cuts, and austerity—unless they are overthrown.
