Lessons from the German Debt Model

By | Finance

Amid news that Canadian credit spending and debt loads have continued to climb, and that resource-economy downturn and sky-high housing-market have created further economic pressures for the average citizen, where should we turn for some degree of positive change in our personal financial lives? Where is the balance point between having a place to live, a job, a manageable monthly budget, and a reasonable freedom from debt?

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The answer could be… Germany?

This blog is not suggesting that you pack up your things and get on the next flight to Frankfurt. However, public and government policy related to German debt management, going as far back as the end of the Second World War, has created conditions for debtors that seem idyllic for many in North America.

For one: German citizens have been historically loath to spend on credit. In a nation where the national consumer spending figure has risen steadily since 1995 to a current high of EUR384.17 billion, the debt-to-income ratio has declined to 82.78%. Canada’s debt-to-income ratio currently stands at a chart-busting 163.7%, nearly double that of our Teutonic counterparts. And while consumer credit use in germany is on the rise in the past year, compare the ten-year trends (Germany in blue/left hand scale, Canada in black/right hand scale:)

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A deep-seated aversion to debt and an emphasis on responsibility characterize the German approach to personal finance – a cultural shift largely attributable to the country’s experience in both World Wars, interwar hyperinflation, and subsequent imposed currency reform. Without going into an essay-length analysis of the economic fallout from those events, it’s safe to say  German consumers are not known for being big borrowers. But when they do borrow, they opt for personal loans. With a loan, they can compare prices in advance and only borrow what they need. They can also make sure that they set up a reasonable term to pay off the debt. These are the same principles at the core of the alternative lending market in North America. Given the increasingly conservative approach to risk in major banking environments, such a transition seems logical for Canadian consumers as well – a move that would reduce overall debt load and help more consumers reach solvency and stable financial planning in the longer term.

The other major piece of the North American debt puzzle is, of course, the housing market. Here, too, we can compare and contrast with the German model to see how consumer attitudes might be shifting at home in the near future. Germans have some of the lowest homeownership rates (compared to renting) in the world: in 2013, only 43% of the populace were registered as homeowners. This, too, can be pinned to postwar policy decisions, but also to more modern regulatory measures that make renting tax-agreeable and inexpensive in both the long and short terms.

The Canadian housing market is experiencing a challenging moment: major markets in large cities are feeling the effects of upward pricing pressures, while markets affected by resource-economy downturn experience their own set of obstacles. Home ownership – especially for the late-millennial buyer populace looking to start families- has been cited as a “disappearing dream” for many. The cultivation of diligent financial management has assisted many Canadians in pursuit of this goal, in a cultural environment where homeownership is prized as a significant milestone. However, the cultural importance of homeownership has also created unsustainable debt loads and difficult financial situations for many Canadians. Could we take a page from the German model (influenced as it was by strict regulation of housing development) and become more adjusted to viewing the idea of long-term rental as a normal, acceptable outcome rather than a failure to plan or a concession to market adversity?

What do you think? Do Canadian financial planners have something to learn from Germany’s example?

 

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