The Ticking Time Bomb of Canadian Consumer Debt
Canadian appetite for consumer debt continues to grow, with total debt including mortgages now standing at $1.529 trillion, according to Equifax’s Q4 National Consumer Credit Trends Report.
The average debt held by Canadians, excluding mortgages is now at $20,967, with debt-to-income ratios at an all time high of 163% according to Statistics Canada. Growth in Canadian consumer debt was primarily driven by installment loans and auto loans, but credit cards saw the highest increase in demand for credit.
On the flip side, while Canadian indebtedness continues to grow, Canadian delinquencies, a leading indicator of credit losses, actually declined to 1.09% the lowest since 2008.
“It’s a cautionary tale what we are currently seeing in the Canadian economy,” explained Regina Malina, senior director of decision insights at Equifax Canada. “The rapid decline in oil prices caught many by surprise. And, that’s the point – consumers and business owners need to be more vigilant. When economic change happens, it can happen very quickly and can challenge previously observed stability of key economic and credit indicators.”
“Overall, delinquency and bankruptcy rates have been stable or decreasing over the last three years,” advised Malina. “These are some of the economic indicators that we’ll continue to watch closely over the remainder of this year. ” But that didn’t stop the Bank of Canada from issuing a warning in December that rising levels of household debt were the biggest risk to Canada’s economy.
Low interest rates have made it easier for consumers to borrow. Interest payments made up 6.8 per cent of disposable income in Q3 2014, Statistics Canada said, the lowest in records back to 1990. As a result, while Canadians are borrowing more, loans are taking up less of each person’s disposable income to service. However, should the labor market soften, or rates rise, outcomes can change quickly and drastically.
The national unemployment rate decreased from 6.8% to 6.6%, from Q3 to Q4, which might explain the decrease in delinquency. However, if the resource based economy of Canada continues to suffer and unemployment rises, we could see a sharp rise in delinquencies and bankruptcies (which have already risen).
Canadians currently have $82.3 billion in credit card debt, a growth of $500 million in outstanding from the previous quarter, which could be attributed to seasonality and holiday spending in the months of October, November and December.