Concerning trends in mortgage growth, auto loans, and insolvencies could be made even worse by inflation, says Equifax
Despite government many Canadians becoming more able to pay their debts, Canada’s consumer debt burden has grown to worrisome levels as trends in the housing space ripple out into the broader economy.
According to new figures from Equifax Canada, overall consumer debt ballooned to $2.15 trillion in Q2 2021, up 3% from the previous quarter and 7.5% from Q2 2020.
The primary force behind that, according to the firm, has been growth in mortgages. New mortgage volumes swelled to over 410k in Q2, the highest-ever volume documented in a single quarter. The figure also reflects a 60.2% increase over the same period in 2020. Amid soaring home prices, the average loan amount for new mortgages has exceeded $355k, a 22.2% increase from Q2 2020.
Against a backdrop of high mortgage growth and low interest rates, home equity lines of credit (HELOCs) have rebounded. New HELOC volume rose 56.7% relative to the second quarter of last year, representing the steepest acceleration in the last 10 years.
“The HELOC trend is worrisome as often the payments are tied to a variable interest rate,” said Rebecca Oakes, AVP of Advanced Analytics at Equifax Canada. “In 2018 when interest rates went up, we saw a drop in credit card payments, especially among consumers with a HELOC … [and] higher bankruptcies among older consumers with HELOCs.”
And while consumers with lower credit scores represented just 10% of new mortgage debt, Oakes said the average loan amount they’re taking out has increased in pace with consumers that have higher credit scores. That leaves them more vulnerable should the economy stumble from its path of post-pandemic recovery.
“Prices for consumer goods have risen and if the inflation trend continues, there is potential for an earlier-than-planned interest rate increase to curb this,” Oakes added, noting how inflation has ticked up to 3.7% year-on-year, its highest annual increase since May 2011.
“With many consumers now heavily leveraged and the potential for increases on variable rate mortgage and HELOCs, consumers may find themselves not in a position to pay back their debt obligations if interest rates rise,” Oakes said.
Auto and installment loans have also helped to pump up consumer debt, with Q2 numbers reflecting marked volume increases in new auto (47.7%) and installment loans (19.5%). New credit card growth is also accelerating, with new card volume doubling from its year-ago lows, and average credit limits assigned to new cards are up 4.4% compared to the same period last year.
Delinquency rates have been a silver lining as they dropped from their Q1 2021 levels. Relative to Q2 last year, there’s also been a decline in the 90+-day delinquency rates for both mortgage (down 32.6% this quarter) and non-mortgage products (down 28.6%).
“[H]owever, insolvency volumes are higher this quarter than the lows of last year,” Oakes said, warning that some consumers with decent credit scores and no delinquency history on file may file for insolvencies without warning. “We’ll continue to monitor how increases in inflation and decreases in government incentives impact consumer debt levels and insolvencies over the coming months.”