March 14, 2019
Paying our debts
Many Canadians are in a bad way, saying they’ll have to sell assets and tap their RRSPs to juggle their debts this year.
At the same time, many expect to add to their burdens by opting for new debt, a survey done for the Financial Planning Standards Council and Credit Canada indicates.
This comes after a rise in interest rates, though they’re on hold now, and an increase in loan defaults, though the rate of delinquencies is small.
It also comes in advance of Finance Minister Bill Morneau’s March 19 budget, and observers speculate he’ll take action on affordable housing, which could open the credit taps further.
“Much like all levels of government, Canadian households are also awash in debt,” the two non-profit groups said as they released the survey conducted by Leger among more than 1,500 Canadians in early January.
The poll was conducted before the Bank of Canada signaled a halt in its rate-tightening cycle amid growing economic uncertainty.
The survey showed that 19 per cent of indebted Canadians, asked whether they “somewhat agree” or “strongly agree,” believe they will have to sell assets, such as a vehicle, tap into registered retirement savings plans, or take out a second mortgage to pay down or pay off debts this year.
The number of men far exceeded the number of women, at 24 per cent versus 14 per cent. Similarly, those with kids under 18 topped those without, at 23 versus 16 per cent.
An interesting tidbit here is that 62 per cent of indebted Canadians also expect to take on new debts, such as new or higher credit card balances, lines of credit, vehicle loans or leases, and mortgages.
Credit growth has slowed markedly in Canada amid higher interest rates and new mortgage-qualification stress tests brought in early last year.
And we learned today that the household debt burden in Canada isn’t just high, it’s rising.
The key measure of credit market debt to disposable income rose in the fourth quarter to a seasonally adjusted 178.5 per cent, with “growth in debt slightly outpacing income growth,” Statistics Canada said. Unadjusted, that figure is a record 174 per cent.
What that means is that Canadians owe about $1.79 for each dollar they have to play with.
“The health of Canadian balance sheets unexpectedly deteriorated in Q4 with the key household debt-to-income ratio steering back to an all-time high,” said Bank of Montreal economic analyst Priscilla Thiagamoorthy.
“But, the bigger picture is that household credit growth is still headed in the right direction, slowing to a much more sustainable rate than in previous years. Look for debt ratios to remain steady or move a bit lower this year amid a cooler housing market and softer consumer spending.”
The debt service ratio, which looks at what we have to pay in principal and interest compared to disposable income, rose to 14.9 per cent.
“The metric we’re watching closely is the debt service ratio - the share of household incomes going toward principal and interest payments on debt,” said Royal Bank of Canada senior economist Josh Nye.
“While we expect the [Bank of Canada] won’t be raising rates again until later this year, the DSR is still likely to edge higher in the coming quarters as homeowners renew fixed rate loans at higher interest rates,” he added.
“At this stage, we think the increase in debt servicing costs is more of a headwind to consumer spending than a financial stability risk. While the debt service ratio is high by historical standards, the pace of increase is not out of line with previous tightening cycles. And clearly the BoC is sensitive to the challenges facing households.”
Wealth also eroded in the quarter, largely because of a decline in stock values, which have since picked up again, and a hit to the housing market.
“You may not be as rich as you think,” said Toronto-Dominion Bank economist Ksenia Bushmeneva.
“After two back-to-back declines in the second half of last year, the wealth of Canadian households was actually lower at the end of 2018 than it was a year ago,” she added.
“This marks the first year-over-year decline in household wealth since 2009, as stock and oil prices plunged and real estate values fell.”
Observers expect Mr. Morneau to address the issue of housing affordability in next week’s budget, possibly via higher maximum amortizations or raising the limit a first-time homebuyer can take out of an RRSP.
That won’t solve the problem for young people because the issue is one of supply in the types of housing, RBC said in an earlier economic report.
Not only that, such measures could serve to again push up home prices, said RBC senior economist Robert Hogue.
“So any near-term benefits to buyers could be quickly reversed by a loss of affordability arising from higher property values – an outcome that would pose a challenge for subsequent age cohorts trying to break into the market,” Mr. Hogue said.
“And let’s not forget the impact on household debt – a top vulnerability for our economy,” he added.
“Any new measures that ultimately increase household borrowing could only make the existing household debt problem worse.”
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