MONTREAL ― Canadian households may be going bust at the fastest pace since the financial crisis a decade ago, but that’s not stopping other consumers from taking on debt.
Despite policymakers’ attempts to cool down Canadian household borrowing, falling interest rates this year have convinced consumers to jump right back into the red. Statistics Canada reported Friday that household borrowing rose 31.4 per cent between the second and third quarters of this year.
The $28.5 billion Canadians borrowed between July and September is the highest quarterly total since the second quarter of 2017, when Canada’s overheating housing markets were reaching a peak.
Both mortgages and consumer credit (lines of credit and credit cards) saw sharp increases. The share of income that households have to spend to cover their debt payments hit a record high of 15 per cent, Statistics Canada data shows.
“As such, household debt burdens will remain a crucial vulnerability for the Canadian economy for some time,” Bank of Montreal economist Priscilla Thiagamoorthy wrote in a client note Friday.
With debt costs on the rise, the percentage of borrowers who are insolvent ― meaning they have filed for either bankruptcy or a consumer proposal ― has jumped to the highest since the Great Recession a decade ago, according to the federal Office of the Superintendent of Bankruptcy.
As a share of income, Canadians’ debt rose to just under $1.76 for every dollar of disposable income. That’s just under the record high of $1.78 in the third quarter of 2018. Canadians’ debt burden, relative to income, has grown by about 50 per cent since 2004.
“If there’s one encouraging point it’s that the ratio has clearly stabilized after ramping up for much of the past two decades,” Thiagamoorthy wrote.
“And, while debt growth is climbing again, it’s only one half of the equation. Growth in disposable income has been accelerating over the past year, helping to temper any risks.”
The latest data suggests the effects of the mortgage stress test, and other measures to cool borrowing such as the B.C. and Ontario foreign buyers’ taxes, are wearing off.
Those measures were credited with ending several years of very rapid house price growth in some housing markets in the country, like Toronto and Vancouver, which brought home affordability to its worst levels on record.
But recent data shows house prices are accelerating in Toronto again, while Vancouver’s market appears to be bouncing back to more normal sales levels.
Low mortgage rates
The experts say that largely has to do with the decrease in mortgage rates this year. According to mortgage comparison site Ratehub, the third quarter of this year saw the lowest mortgage rates since the house price boom that ended in early 2017, with fixed five-year mortgages available for below 2.5 per cent.
Most real estate forecasts predict low mortgage rates will continue into next year, and that means a little relief for borrowers.
“The good news is the (share of income spent on debt) should start trending lower in the coming quarters, as the decline in rates over the past year flows through to households,” TD Bank economists Ksenia Bushmeneva and James Marple wrote in a client note.