I recently read two new reports on consumer debt trends and on the Canadian economy in general, one from consumer credit bureau Equifax and another from the Bank of Canada. Canadians are taking out more debt, but are also better at paying it back than last year. Is this a good thing or a bad thing? Together, the reports give an insight on what’s happening on a consumer and national level, and what the future could hold.
This month Equifax published its Canadian Consumer Credit Trends report on the first quarter of 2015. It gives an overview of consumer debt, looking at types of debt consumers are taking out, as well as things like city-by-city trends and bankruptcy statistics. Equifax holds over 25 million unique customer files, and has data on over 100 million transactions per month.
The Bank of Canada also released its semi-annual Financial System Review. This report gives an overview of the Canadian economy. It highlights potential vulnerabilities that exist and the risks stemming from those vulnerabilities. As the country’s central bank, its key role is “to promote the economic and financial welfare of Canada”. The job of the Financial System Review is to look ahead to issues that could affect the financial system.
So what did I learn from my time looking at a bunch of bar and line graphs? Here are three key things I learnt from each report.
Equifax report on consumer debt
Compared to the same period last year:
Average consumer debt rose 2.7%
Demand for new credit rose 2.7%
Delinquencies fell by 3.7% and bankruptcies by 6.7%
Bank of Canada report
Household debt is growing faster than income
House prices keep rising in some regions
The effect of falling oil prices has not fully hit yet
Let’s look at the reports in more detail, starting with Equifax.
Calgary has the most debt in Canada, but Halifax uses its debt the most
The Equifax report provides data on debt trends in different Canadian cities. For each city you can see the average credit limit, balance and utilization. Comparing cities against each other presents an interesting picture.
The table below shows the average limit, balance and percentage utilization for consumers (excluding mortgage debt) in Vancouver, Calgary, Toronto and Halifax:
Of these cities, people in Calgary have the highest average limit at just over $66,000, and of that they use on average $23,281, or 36.50%. Vancouver has the second highest average limit ($63,771), followed by Toronto ($54,341) and Halifax ($49,092). This higher access to credit in Calgary and Vancouver makes sense given the higher average incomes in these cities. Utilization tells a slightly different story, with Halifax highest at 45.6%, then Calgary (42.2%), Vancouver (36.5%) and Toronto (35.6%). Halifax does have a lower average limit and second lowest balance, but the high utilization shows less breathing space (perhaps linked to lower average incomes and house prices, and less access to credit).
Bank of Canada report – vulnerabilities in the economy
The report from the Bank of Canada helps to put these figures into the wider economic context. Of the three key vulnerabilities in the financial system that the Bank lists, two of them relate directly to Canadian consumer activity:
Household debt has risen
The housing market is imbalanced and may overheat
Let’s take these in turn.
First – household debt is up. While there is always going to be household debt, the Bank of Canada says the risks posed by it have increased because the drop in oil prices is affecting incomes. This “oil shock” will directly affect those who work in the oil sector, but it also has a wider indirect effect on the rest of the Canadian economy (for example, a company that makes machinery for the oil sector, and in turn the transport company that delivers the machinery, and so on). The Bank also notes that more risky types of household borrowing are increasing (such as auto and mortgage lending to sub-prime borrowers).
Second – the housing marketing is imbalanced and house prices could be overvalued. The Bank notes that provincial housing markets are showing three different trajectories:
Ontario and B.C – there is strong resale activity and growth
Eastern Canada (Quebec and the Atlantic provinces) – the market has been “moderating” for well over a year
Alberta and Saskatchewan – there is a slow-down in the market due to the drop in oil prices
Nationally the annual growth rate in house prices has slowed from 5% in December 2014 to 4.5% in June 2015. But the rise in house prices is greater than the rise in incomes.
Bank of Canada report – potential risks
After the health check-up, the Bank looks at the risks to the economy that could emerge from these vulnerabilities. One of these is that an economic shock places stress on households and people are less able to service their debts. This would result in a drop in house prices (fewer people buying, more people defaulting on mortgages, etc.). This could be due to a drop in household income (e.g. resulting from lower oil prices reducing jobs and lowering wages). The Bank thinks that the chances of such a large shock happening are low, but the effects would be severe it if did materialize.
Another risk the Bank lists is a sharp increase in long-term interest rates. Rates right now are historically low (lower rates encourage borrowing and the resulting spending gives the economy a nice boost, so the thinking goes). There are various reasons rates could go up, but the upshot is mortgage and credit card rates would rise as a result. Again, the Bank thinks the risk of this happening is low, but it should not be ignored.
In summary, here are the three things you need to take away:
While debt levels are increasing, Canadians are servicing that debt well
Current trends in household debt and the housing market still do pose a risk (albeit low) to the Canadian economy
The effects of the “oil shock” are yet to be fully realized
The Equifax and the Bank of Canada reports provide two different but complementary perspectives. While households will always be subject to larger economic effects that are out of their control, there are steps people could take to lessen the effect if the economy turns. House prices cannot go up forever. Credit will not always remain so cheap. And so now is a good time for Canadians to take stock of their financial situations and to think long-term.
One thing to do is look at the types of debt you are carrying. For example, carrying a balance on credit cards is not a good idea, as the rates are typically 19.9% or 29.9% and minimum monthly payments often do not reduce your balance. A home equity line of credit could also be variable rate, resulting in more interest if rates go up. It is always worth checking your options in the market from time to time. Borrowell is focused on providing loans with fixed rates and fixed monthly payments that reward responsible Canadians for their good credit. Checking your rate on Borrowell’s website takes less than a minute and will not affect your credit score.