The outlook for family finances in 2008 is a mixed picture. A new report from the Ottawa-based Vanier Institute of the Family says hourly wage gains in 2007 outpaced price increases by about 1% for the second year in a row. However, debt is rising faster than incomes, the savings rate is falling and almost half of all households are unable to make ends meet.

On the positive side, says Roger Sauvé of People Patterns Consulting in Summerstown, Ont., author of the report, the improvement in hourly earnings, combined with more earners per household and reduced tax payments, has allowed real average household incomes to rise during the past four years.

Sauvé notes that Canada’s job creation record has been very positive for most of the past decade, and this continued into 2007. Labour shortages in some parts of Canada have pushed up hourly wages. That is particularly true in Alberta, where hourly earnings in actual dollars jumped by almost 6% in the first 11 months of 2007 over the same period in 2006, he says. Five other provinces have experienced wage gains of 4.4%-5.1%, says Sauvé, although the gains varied among industries and occupations.

The bad news for most families is that debt is also rising. In late 2007, the average total debt load per household, including mortgage debt, moved above $80,000 for the first time, according to the report. Total debt is now equal to a record 131% of household income after transfers and income taxes, Sauvé says. This compares with 91% in 1990. Taking the whole period from 1990 to 2007, average household spending jumped by 20%, which is almost triple the 7% advance in real incomes.

An earlier survey by the Certified General Accountants Association of Canada found that meeting day-to-day expenses and purchasing durable goods were the two main causes of increasing debt. The same survey also found that 17% of indebted adults said they had problems handling debt; the reasons most often cited were “lower than expected incomes” and “difficulties in managing spending.”

The CGAA says many Canadians are in denial about their debt. According to Anthony Ariganello, president and CEO of the CGAA: “Many Canadians think escalating debt and lack of savings are no cause for concern in today’s favourable economic conditions. Few seem to fully appreciate the harmful consequences of swelling debt into the future.”

Clarence Lochhead, executive director of the Vanier Institute, says that while there may be a tendency to blame rising debt levels on poor fiscal management, “a lot of it is basic stuff that people need.”

To be fair, says Lochhead, many households have money tied up in real estate and mortgages, and rising house prices have, on average, increased net worth. In fact, the report found net worth per household (in 2005 dollars) averaged $395,500 in 2007, compared with $235,700 in 1990 — a 68% increase. The percentage gain in net worth was, therefore, far larger than the increase in debt.

But Lochhead is also concerned that most families are saving “next to nothing.” The Vanier Institute report found average savings per household in 2007 — the difference between average household incomes and average household spending — were only $1,000 for the year. This is half the level it was in 2002 and far less than the $7,500 of savings per household in 1990.

Savings are like shock absorbers, Lochhead says: “They provide an essential cushion to the inevitable bumps and potholes we encounter. Without them, the bumps become jarring and have the potential to cause considerable damage — to our property and to our health and safety.”

As household savings have plummeted, Lochhead warns, the financial shock-absorbing capacity of a great many families may have deteriorated to the point at which common experiences — such as illness, job loss or rising costs of living — may cause them to “bottom out.”

Lochhead also points to the difficulties many younger families face. It’s now almost expected that people will get a post-secondary education, he says. As a result, young people may start their careers burdened with very high student-loan debt.

“Do we consider it normal to be forming a family and starting off with $40,000 worth of student debt?” Lochhead asks. “This sets people off on a different kind of trajectory of earnings, savings and debt than we might have seen in the past.”

@page_break@According to the Vanier Institute report, almost half of all households in Canada are spending more than they earn, with younger families generally being in a worse position than those in which the main income recipient is older. Among the poorest one-fifth of households, the annual revenue shortfall ranged from $7,100 for those households in which the main income recipient was under 35 to $500 for households in which the main income recipient was 65 or older. (See right-hand table.)

The Vanier Institute report also found that the majority of lower-income households give up on home ownership. Only 37% of families in the lowest income group own their own homes, while 94% of families in the top one-fifth of households are homeowners. While home ownership tends to improve as household members grow older, the report notes the poorest households at any age never attain the home-ownership rate that even the youngest in each of the middle, upper-middle and richest households reach when they are still under age 35.

“These tendencies are important,” Sauvé says, “because home ownership is one of the major ways in which households build up wealth. The majority of the poorest are never able to make the jump.” IE