Canadians are getting the message on cutting debt levels with growth in household credit now rising at its slowest pace since 2001, finds CIBC’s latest Household Credit Analysis Report.
Inflation adjusted growth in household credit in the third quarter of 2010 was the slowest in nearly ten years, while the 0.27 per cent increase in credit during November (the latest available data point) was the softest monthly reading in more than 15 years.
“After coming through the most leveraged period of consumer spending in recent history, Canadians are getting the message that they need to cut back on their debt levels,” says Benjamin Tal, Deputy Chief Economist at CIBC. “After rushing back to shop in 2010, consumers will take a well-deserved break in 2011. The softening in the monthly pace of job creation from an average of 31,000 in 2010 to 20,000 in 2011 will single-handedly slow growth in personal spending by more than 0.4 percentage points.
“But as important will be the change in the propensity to spend. With the U.S.-Canada saving rate gap at a 40-year high, and ongoing indications that monetary authorities wish to curtail the risky level of household debt, 2011 should see the beginning of an adjustment in the household balance-sheet.”
While overall credit growth has dramatically slowed, mortgage credit levels are still rising at close to seven per cent on a year-over-year basis, although in recent months that pace has also slowed.
“A closer look at the monthly pattern reveals that the market is now growing by a monthly rate of only 0.4-0.5 per cent,” adds Mr. Tal, author of CIBC’s Household Credit Analysis Report.
“The reduced demand for mortgage credit is more notable among first time home buyers—a trend that is already visible in the brokerage channel. The recent changes to the market introduced by the Ministry of Finance recently are not significant enough to derail the market, but are sufficiently targeted to soften marginal borrowing. We estimate that the move to shorten the maximum mortgage amortization from 35 years to 30 years will cut the growth in mortgage originations by roughly two to three percentage points in 2011. Overall we expect mortgages outstanding to rise by close to five per cent in 2011 after an estimated 7.7 per cent increase in 2010.”
The report notes that mortgage arrears appear to have peaked in February 2010 and are now stabilizing. The arrears rate is currently at 0.43 per cent—up from 0.24 per cent in early 2006. Mr. Tal notes that while this is significantly higher than it was before the recession, this number is well below the arrears rates seen in previous recessions.
After rising since early 2008, consumer bankruptcies are also now in a clear downward trend with the number of bankruptcies now falling by close to 25 per cent on a year-over-year basis. On a cumulative basis, they are now falling by close to 19 per cent with Ontario showing the best improvement.
Despite softening credit growth, the report found that the debt-to-income ratio continued to rise in the third quarter of 2010. Debt increased by 1.3 per cent while income fell by 1.5 per cent. As a result the debt-to-income ratio climbed to a new record high of 146.
While Canadians’ debt continued to grow, Mr. Tal says that the cost of covering these debts is trending downward. “Debt interest payments now account for 7.2 per cent of disposable income—the lowest debt service ratio since mid-2006. While debt is still rising faster than income, it is no longer rising faster than assets. The net worth position of Canadians has improved in the third quarter in absolute terms and relative to income.”
“Our expectations that the housing market will stagnate in 2011 and might even see some softening in the second half, suggest that the estimated eight per cent rise in net worth in 2010 will not be matched in 2011. And with consumer spending dancing to the tune of changes in net worth this represents another source of slowing for consumers.”
While much of Canada’s GDP in recent years has been driven by highly leveraged consumer spending, Mr. Tal sees much different and more sustainable factors driving the economy this year.
“The seemingly benign 2.4 per cent GDP growth projected for 2011 masks the dynamics of powerful economic forces pulling in different directions.
“The end result will be another year of only middling growth, but a new mix of economic activity as a vibrant business sector will gradually take over for an exhausted consumer and restrained government. Look for the Bank of Canada to start raising rates as early as May of this year, but the overall speed and magnitude of future rate hikes will be limited by the growing effectiveness of monetary policy and a modest recovery.”
Other key findings in CIBC’s Household Credit Analysis Report:
- Lines of credit are now rising by a monthly pace of 0.3 per cent, the slowest pace since 2007 and down from nearly two per cent in late 2009. Arrears are down to .22 per cent in the third quarter from .25 per cent in the second quarter.
- A similar trend can be seen in the direct loans portfolio with the delinquency rate falling notably in recent months and is now at a record low of 1.23%.
- The overall growth in credit cards outstanding has stabilized at below 1 per cent (year-over-year). This pace is unlikely to accelerate in the near future.
Credit card delinquency rates and bad debt have risen notably over the past year, but recent delinquency figures reveal an improving trend. Given the sensitivity of this portfolio to developments in the labour market, a relatively stable unemployment rate in the coming quarters suggests that delinquencies in this portfolio have already peaked and will probably improve a bit in the coming few quarters.
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/hca-110126.pdf
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