The fact that Canadian households are carrying a significant amount of debt isn’t really news anymore. For several years, both private sector financial advisers and federal government banking and finance officials have warned of the risks being taken by Canadians who took advantage of historically low interest rates by continuing to increase their secured and unsecured debt.
The risks most commonly cited by those advising debtors on having a greater degree of borrowing restraint was the impact that an increase in interest rates would have on their ability to repay — or even service — the debt they had accumulated.
In addition, those advising debtors on borrowings secured by home equity were concerned about a downturn in the real estate market could put those borrowers at risk, or even in a negative equity position, where the amount still owing on their home-related borrowings was greater than the value of their home.
Both of those circumstances have started to materialize in the last two calendar quarters. The Canada-wide real estate market is not in a downturn, however, the expectation among borrowers that real estate values in major urban markets would simply continue to increase without limit has been tempered, somewhat, by the drop in real estate sales in the Greater Toronto Area since the spring of this year.
While real estate prices in that market are still up, as measured on a year-over-year basis, they have declined, overall, from the highs recorded in the winter and early spring of 2017.
The long-anticipated increase in interest rates has finally occurred as well, as on July 12 and again on September 6, 2017, the Bank of Canada raised the bank rate for the first time since September 2010. Predictably, financial institutions responded by increasing their mortgage and other loan interest rates.
The end of June, just prior to the Bank’s first interest rate increase, marked the end of second quarter of 2017. And, as is usually the case, a number of government and non-government organizations issued statistics and analysis of the current state of Canadian consumer debt.
Given the timing, those figures will create a kind of benchmark against which future statistical summaries will be compared, as they create a “snapshot” of the state of Canadian consumer debt taken just as interest rates began to rise, at the end of the ultra-low interest rate environment which began in 2009, and as the ultra-hot real estate market started to cool down.
And the news is … good and bad. The figure which is mostly often quoted in discussions of consumer debt is the debt to disposable income ratio which is published by Statistics Canada. As of the end of June, that ratio stood at $1.68, meaning that the average Canadian household carried $1.68 in debt for each $1.00 of disposable (after-tax) income.
While it’s easy to see that an increasing debt-to disposable income ratio means that Canadians are taking on more debt, that ratio is still a somewhat abstract concept. What is striking, however, is the growth of that ratio over the past quarter century and, especially, since 2005.
In 1990, that percentage stood at 93%, meaning that the debt load of the average Canadian household was 93% of disposable income. By 2005, the debt-to-disposable ratio had risen to 108%. In other words, it took 15 years for the percentage to increase from 93% (in 1990) to 108% (in 2005). From that point, the debt to disposable income ratio accelerated dramatically, as it rose from 108% in 2005 to 150% just five years later, in 2010. The ratio now stands, as of the second quarter of 2017, at 168%.
The StatsCanada figure captures all forms of debt, secured and unsecured, meaning that it includes mortgages, car loans, installment loans of all kinds, lines of credit, and credit card debt.
There are a couple of significant differences between secured and unsecured debt — secured debt, by definition, is secured against an asset, so that in the event the borrower goes into default, the lender can seize the asset in payment of the secured debt. The value of that asset is always, at the time of borrowing, greater than the amount borrowed.
Unsecured debt, by contrast, is provided on no more than the borrower’s promise to repay. Not surprisingly then, the debt rate levied on unsecured borrowings is always higher than secured debt borrowings.
For both those reasons, it’s more likely that borrowers, when faced with an interest rate increase which bumps up their cost of borrowing, will get into difficulty with unsecured debt. And, as of the second quarter of 2017, the average unsecured debt (strictly speaking, “non-mortgage debt”, but in most cases, the non-mortgage debt of Canadians is unsecured debt) owed by individual Canadians was for the first time, over $22,000.
That figure — $22,154 average debt load per individual borrower — appeared in a summary issued by TransUnion, one of the two major credit reporting agencies in Canada. The summary also outlines the average balance per borrower by the kind of debt incurred, as follows:
Bank card (credit card) ………….. $4,069
Automobile …………………………… $20,447
Line of Credit ………………………… $30,108
Installment Loan …………………… $25,455
And, as recently reported by the Financial Consumer Agency of Canada, recent trends in secured debt patterns may also give rise to concern going forward.
One of the fastest growing consumer credit products in Canada is the home equity line of credit (HELOC). A HELOC is similar to a mortgage, in that the debt is secured against the homeowner’s equity in the property. However, under a HELOC, a lender agrees to provide credit to a borrower, not for a fixed amount, but up to a maximum amount, based on the value of the property. Once the HELOC is in place, the available funds can be used for any purpose, whether that purpose is related to home ownership or not.
And, while monthly payments are required, the borrower can usually, if he or she wishes, pay only the interest amount which has accrued since the last payment, without reducing the principal at all.
A report issued by the FCAC in June of this year includes the following statistics related to HELOC borrowing.
- The number of households that have a HELOC and a mortgage secured against their home has increased by nearly 40 percent since 2011.
- 40 percent of consumers do not make regular payments toward their HELOC principal.
- 25 percent of consumers pay only the interest or make the minimum payment.
- Most consumers do not repay their HELOC in full until they sell their home.
If there is good news in the figures summarizing the ever-increasing debt load of Canadians, from all sources, it’s in the fact that borrowers are still managing to keep payment of those debts in good standing.
In fact, delinquency rates (meaning debts on which payments are more than 90 days late) are, for the most part, down during the second quarter of this year, as measured on both a quarter-over-quarter and year-over-year basis. Whether that trend will continue or be reversed as the impact of the recent interest rate increases takes hold remains to be seen.
