Canadian debt load growth rising again
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TORONTO - Canadians have pushed their debt levels to an eight-year high in a climate of ultra-low interest rates, according to a new report that suggests consumers are unmoved by repeated warnings that rates will inevitably rise and those burdens could financially sink some households.
The latest report of Canadian debt trends by TransUnion found the average consumer's non-mortgage debt load rose another $192 to $26,221 in the second quarter — the highest average debt per person it has seen since it began tracking the variable in 2004.
The quarter also marks something of a turning point as the second consecutive quarter in which debt accelerated following more than a year of quarterly declines.
"Since the recession we've seen the growth rate come down and then for five quarters there it really wasn't going very far," said Thomas Higgins, TransUnion's vice president of analytics and decision services.
"In the last two quarters we've seen things starting to slowly ramp up in the other direction and start increasing year-over year."
Debt growth was 2.41 per cent higher than in the second quarter of 2011, though the pace slowed slightly from that quarter's gain of 2.99 per cent. However, during the second-quarter of 2011, the growth rate was on its way down from more than 10 per cent year-over-year prior to the recession.
Credit growth bottomed out in the fourth-quarter of 2011, but has been rising again since.
Consumers have taken advantage of ultra low interest rates since the 2008-9 recession to heap on low-cost debt.
During the most recent quarter, the Bank of Canada's key interest rate — which affects banks' prime rates for loans — remained on hold at one per cent, where it has been since September 2010. Coming out of the recession, the central bank set the rate as low as 0.25 per cent in an effort to stimulate borrowing and therefore the domestic economy.
However, with rates still low as the central bank tries to buffer against a globally depressed economic backdrop, the Bank of Canada has declared household debt the number one risk to Canada's economy.
For a while it appeared Canadians were heeding the repeated warnings of top officials and economists from Canada and around the globe that Canadian debt loads are too high. But Higgins says he believes Canadians are ramping up spending as they become more confident that interest rates will remain low for some time.
Last year, those warnings were paired with projections from economists about when interest rates would rise, but now those calls have largely fallen away, with few willing to predict an end in sight to low-cost credit as global economic uncertainty persists.
"There was a real threat sitting there, but that sort of went away, there isn't any sort of imminent warning ... so that's sort of taken the heat off Canadians," Higgins said.
Canadians hear the warnings, but have to "get hit in the face with it," — a rise in interest rates, especially if it were a surprise, or another quick global downturn like that preceding the last recession — before people are "snapped" into paying attention.
"We still continue to do what we're doing until we see the spike in unemployment because some economic shock hits, or all of a sudden the interest rates go up 50 or 100 basis points and my next line of credit statement shows I'm paying another $100 a month in interest, (then it's like) 'holy smokes I got to do something now.' "
Jeffrey Schwartz of Consolidated Credit Counseling Services of Canada said he was surprised to see debt growth accelerating again after some previous indications things were headed in the right direction.
"They're making these decisions based on impulse and they find themselves digging further into a hole rather than putting money aside or even paying off debt."
The TransUnion report found that during the second quarter, the average consumer owed $3,556 on their credit cards, $33,721 on a line of credit, $22,493 on instalment loans and $18,881 in auto loans.
A moderately encouraging sign in the report was that delinquency or default levels remained low across the board, but Schwartz says the numbers don't seem to reflect the number of people that are already struggling — those who are just squeaking by on low interest rates, but who could default when rates rise.
"What's overweighing the fact that interest rates are really low is that people are overspending," he said.
"They're not really living within their means and it comes to a point in their lives that their credit cards are maxed out, the banks are not providing any more lending to them, the housing market is not on fire so they can't use their homes as cash registers any more and they're just becoming tapped out."
Last month, another consumer credit reporting agency, Equifax Canada reported that consumer indebtedness, excluding mortgage debt, grew 3.1 per cent year-over-year in the second quarter, down from 4.4 per cent in the same period of 2011.
The Equifax study also found that high-interest credit card debt fell by 3.8 in the quarter and consumer bankruptcies were down 4.5 per cent from a year earlier. Meanwhile, bank loans and lines of credit showed very moderate growth compared to a year ago.