Household Debt In Canada
A recent snapshot showed that the indebtedness of Canadians’, a fact of life since 1994 when the debt to disposable income ratio was at parity, has continued to grow. For the first quarter of 2022, Canadians' owed $1.83 in debt for each dollar they earned. And as interest rate increases trickle through the demand side of the economy, household debt servicing will feel a pinch, with some Canadians’ struggling to make ends meet - not to mention inflation.
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Emerging from the pandemic shock, Canadian households tallied savings to the tune of $300 billion CAD due to imposed restrictions. Despite this, debt metrics eventually rebounded. For example, take mortgage debt, which grew in tandem with the post first-wave housing frenzy. Between 2020-21, the national mortgage burden increased by $185 billion - the biggest annual increase in a decade.
Parsing this total debt amount, on the consumer side, credit card debt is back up again too, finding in early 2022 households holding $83 billion in liabilities, an annual increase of 11.6 percent. On student loans, the amount owed to the federal government stood at over $22 billion, which doesn’t include provincial loans, bank financed lines of credit, or university-specific credit charges.
Source: Statistics Canada
A key driver of consumer debt is the pressures sourced from credit cards, which can stretch a household’s “debt ratio”, representing the amount of monthly debt payments one has relative to monthly income. And because debt builds, once accumulating, it can become a tough hole to dig out of. Earlier this year, total credit card spending was up by 14.4 percent when compared to Q4 2020. The average monthly spend per credit card is now $2,205, up by 15.2 percent this quarter when compared to the last quarter in 2020, and up by 6.8 percent when compared to the pre-pandemic period of 2019 (Q4). Based on insights delivered this summer, new card volume was up by 31.2 percent when compared to Q1 2021. Market observers note that lenders are providing higher limit cards to consumers, with the average allowance reaching over $5,500, the highest it has been in the last seven years. Overall, credit card balances are up by 9.5 per cent this quarter when compared to Q1 2021.
But a bulk of household debt remains tied to mortgages. As homes, and the equity they build, are framed as an investment by middle-class Canadians’, it’s easy to overlook this potential debt impact; that is until rate increases begin inflating monthly payments. In a recent Statistics Canada report on household finances, it was noted that when comparing June 2022 to the year before, mortgage debt was up 9.6 percent, to a total stock of $2.04 trillion. Now, following a 100 bps increase in the policy rate by the Bank of Canada in July, with the expectation for more to follow with its next rate announcement on September 7th, Canadians’ can expect to pay more for what they’ve bought. Question is: can they handle it?
Unmanageable and unserviceable debt is a problem for Canadian households. And unfortunately for them, the debt counselling tools provided by the government are arcane. Have a look for yourself. If beset with financial turmoil, would this resource bring you calm and a sense of direction?
Source: Equifax Canada
Here are some recent statistics policy-makers should take note of. Earlier this summer, non-mortgage loan debt grew by $3.4 billion, reaching a stock of $714.5 billion. Of this amount, credit card debt increased for a fifth consecutive month, having now reached 96 percent of their levels in February 2020, before the pandemic. And home equity credit lines increased by $1.1 billion, to reach $171.1 billion in June.
But what makes these top-line figures tricky to grapple with is that Canada is not singular. Its different regions and cities, each provide a distinct story of financial pressures and tensions. Here in addition to household debt pressures, impacts from debt servicing, inflation too, are felt differently by different locations. Thus to best support these consumers who are also citizens, debt solutions ought to be also tailored and help highlight and address local realities, such as unique housing pressures. Government policy interest focused on Vancouver’s condo market does nothing to help the over-indebted household in Fort McMurray. And more so, because as the fundamentals currently stand, the fastest debt growth is being felt by those with smaller debts. And small debts don’t stay small for long.
Credit Card Spending Ramps Up as Inflation Soars, Equifax Canada
Total consumer debt increased by 8.6 per cent in Q1 2022, climbing to $2.3 trillion over the last 12 months. On an individual basis the average consumer debt (excluding mortgages) is now $20,744, an increase of 1.5 per cent when compared to Q1 2021. It is the first year-over-year increase since 2019.
Monthly Credit Aggregates, June 2022, Statistics Canada
“Overall, the total credit liabilities of households rose 0.8% (+$21.4 billion) from May to reach $2,755.2 billion by the end of June. On a seasonally adjusted basis, total credit liabilities of households were up 0.6% in June, following a 0.7% rise in the previous month. Real estate secured debt, composed of both mortgage debt and home equity lines of credit, rose by 0.9% (+$19.1 billion) to surpass $2.2 trillion."