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Friday, December 8th, 2023

Record household debt triggers warnings over ‘insatiable’ borrowing


Here’s something to keep in mind as you head out to shop this weekend: There are fresh signs and warnings about the “insatiable appetite” for consumer debt.

The Bank of Canada has amped upimage its concerns, warning Wednesday that, while the economy is improving, “household imbalances, meanwhile, present a significant risk to financial stability.”


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LET’S TALK INVESTING Video: Are your debts making you sick? The central bank has oft cited this threat as household debt burdens rose to record levels. Its latest red flag went up on the same day as two reports underscored the swollen debts among Canadians just as the holiday shopping frenzy begins.

In one report, Equifax Canada said that “Canadian consumers have yet again tipped the scales setting a new benchmark of over $1.513-trillion in debt.”

That third-quarter figure marked an increase from $1.448-trillion in the second quarter and $1.409-trillion a year earlier, according to Equifax, whose numbers are based on more than 25 million unique consumer files.

Excluding mortgages, average debt held by Canadians has increased 2.7 per cent to $20,891.

There is a bright spot, however, in that delinquency rates declined.

The second report, from Royal Bank of Canada, put the overall figure, which includes mortgages, even higher at just under $1.8-trillion as of October.

Citing the latest central bank data suggesting household debt climbed 4.5 per cent from a year earlier, RBC economist Laura Cooper observed that “Canadian households’ insatiable appetite for credit was evident in October.”

The residential mortgage market is holding steady, Ms. Cooper said, while “a sustained period of low interest rates set against a strengthening economic backdrop is likely abetting a pickup in non-mortgage credit growth.

Those types of credit, which include plastic, lines of credit and other personal loans, rose 2.9 per cent in the year through October.

Meanwhile, the housing markets in key cities continue to soar.

For example, the cost of a single-family detached home in Vancouver is “closing in on a cool $1-million,” senior economist Sal Guatieri of BMO Nesbitt Burns said in a research note.

Equifax warned that indebtedness is expected to reach new heights over the holiday shopping season.

“Following a frenzied start to the festive shopping season with more to come in the countdown to Christmas, we can expect the consumer debt to rise even further,” said senior director Regina Malina. “Tis the season, so we can anticipate credit cards getting a strong workout throughout December.”

The Bank of Canada “seemed more concerned than before about the financial stability risks associated with household imbalances,” said Canada economist David Madani of Capital Economics. “This isn’t surprising, given the pickup in housing activity lately and further inflation in home values.”

The extended low-interest-rate environment is the main driver of the continued increase in consumer indebtedness, Equifax said.

The central bank and federal Finance Department have for a long time voiced concerns over the hefty debt load Canadians are carrying, levels that now significantly exceed those in the United States.

“We’re in good shape right now but we definitely have to stay vigilant,” Ms. Malina said in an interview. “I think there is a general agreement that, even if interest rates started to come up in 2015, they would not be coming up quickly.”

The status update on debt is worrisome but at the same time delinquency and bankruptcy rates have been inching down each quarter, she said. “The fact is, while debt figures have gone up, they have increased at a slower rate in the third quarter with most Canadians seemingly still spending within their means.”

The rise in consumer demand for new credit has been fuelled mainly by credit card and auto credit inquiries, Equifax added.

Auto makers have been making it easier to finance car purchases, with enticements such as longer repayment periods that reduce the monthly cost.

The biggest increases were in the auto-loan and installment-loan sectors, at 6.8 per cent and 5.8 per cent year over year, respectively.

The delinquency rate, which tracks bills overdue by 90 days or more, fell to 1.10 per cent from 1.11 per cent in the second quarter, its lowest level since 2008.


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