How much?
It is a question on most minds these days.
Rising interest rates, a still imperfect supply chain plus some unadulterated greed, all factor into more expensive goods and services. It is not much wonder consumers examine purchases more sincerely these days.
For many people and businesses, interest expenses are consuming more of their budget. With the first increase by the Bank of Canada, homeowners with variable mortgages saw immediate hits in the hundreds of dollars range. Latterly, payments have increased by thousands in many cases and some folks have had to extend their amortization period from the traditional 25 year to a longer sentence of 30 and in the most severe cases 40 years.
Increasingly Canadians are looking at generational ownership, much like was practiced in Europe where highly inflated prices led to multiple generations paying the bank before the property was owned free and clear. Recent articles in newspapers and social media posts suggest how unseemly the numbers have become. Either an insurmountable down payment is required, or a high-end income is needed to enter the housing market.
A quick calculation for a $750,000 mortgage demands a $4,800 monthly payment. Tack on utilities and taxes and a family could easily need household income in excess of $200,000 per year. This doesn’t take into account car payments, insurance and the other obligations that come with raising a family.
These numbers are astronomical and may explain recent reports that consumers and businesses have been tapping credit lines and credit cards to bridge the gaps. This may help in the short term to avert a crisis, but it begins a new cycle of dependence that can be even harder to escape when the walls close in further.
Another upcoming concern some businesses are now focusing on are their (Canada Emergency Business Account) CEBA loans. During the pandemic, a life raft of up to $60,000 administered through banks and backed by the federal government were given to qualifying businesses.
According to the Canadian Federation of Independent Business which pushed the concept, nearly 250,000 businesses may be unable to pay the loan back this December when it comes due. Those who can pay will have a portion of that fee waived.
Over the next 26 weeks, the businesses involved will need to hive away $1,540 per week to come up with the $40,000 due. If unable to meet that target, they will be on the hook for the full $60,000 and charged interest at 5% on the balance. Calls to write off the loans or extend the deadline are already underway.
Curiously, the notion of free money or no-risk financing seems to have found currency as an expectation with many these days. We are reminded of that oft-repeated phrase of Prime Minister Justin Trudeau that “the budget will balance itself.” For clarity, the Conservatives who use that as a clarion call haven’t proven much better over the course of time. The conversation point, however, is that somewhere along the way, current generations have bought into an economic narrative that isn’t sustainable in the longer term. Covering the interest is only part of the equation.
Some years back we started to note various businesses purchasing out competitors. Premium prices were paid in our estimation, but we presume low interest rates and creating monopoly conditions made those choices palatable. For us though, the missing link to many of those choices for business or even consumers are that the principal eventually needs to be paid.
While we generally endorse investment by businesses and government entities to meet future needs, “the math” needs to work. Case in point are the federal and provincial payouts associated with job creation, more specifically battery plants in southern Ontario. Working back the math, these investments seem like mighty expensive photo-ops rather than wise business choices.
“How much?” is a question that needs asked more regularly.
