First National Financial LP

Market Memo: Debt load, delinquency and insolvency

  • First National Financial LP

A rule of thumb used by economists says it takes approximately two years for interest rate increases to catch up with debt-burdened consumers. Using that formula, 2019 should be the year. We should be seeing a spike in insolvencies. 

Record setting debt

Canadians have been piling on debt at a record setting pace for the past decade. Low interest rates that followed the financial crisis in 2008 triggered a borrowing frenzy, particularly mortgages. Then, in the middle of 2017, the Bank of Canada started raising rates. They went from 0.5% to 1.75%. Numbers released earlier this year show there has been an increase in insolvencies. 

Bankruptcies decline 

The 12 months ending on May 31, 2019 saw nearly 123,000 consumer insolvencies – a 5.2% increase compared to the same period a year earlier. Proposals climbed about 12%, but actual bankruptcies fell nearly 3%. 

Back in June, the credit monitoring service Equifax reported that the average Canadian consumer was carrying $71,300 in debt, including mortgages – a 3.2% increase from a year earlier. 

Delinquency rate is minimal 

Some of those numbers may seem ominous – and they are worth noting – but another early warning sign of trouble remains remarkably low. The consumer delinquency rate (late payments that have stretched out beyond 90 days), which has been falling for years, stands at just 1.12%. That is despite a 3.5% increase in May. 

Helpful economy 

The Canadian economy has also been providing consumers with some relief. Growth has been recovering, the job market is strong and wages are increasing. As well, the Bank of Canada has shelved its desire to raise interest rates, for the time being.