Canada’s highly indebted households are starting to show serious signs of debt overload. Equifax data shows the rate of auto loan delinquencies hit a rarely seen level in Q3 2022. Consumer credit in general has seen rates begin to climb as interest rates rise. Housing remains the one exception, though that’s likely to change as the market adjusts to higher rates.
Canadian Auto Loan Delinquencies Climbed Aggressively
Canadian auto loan delinquencies are climbing aggressively, hitting rarely seen levels. In Q3 2022, about 1.97% of auto loans had become delinquent. It was a big climb of 0.31 basis points (bps) from last year, an exceptionally high rate of delinquencies. Other than three quarters (Q4 2019 to Q2 2020), the rate hasn’t been this high in at least a decade.
Canadian Auto Loan Delinquency Rate
The share of auto loan accounts that are at least 90 days past due.
Source: Equifax; CMHC; Better Dwelling.
Delinquency Rate Is Climbing For All Consumer Credit Products
The end of the cheap money era has led to climbing delinquency rates for all consumer debt. Credit card delinquencies climbed to a rate of 1.29% in Q3, up 30 bps in just one year. Despite hitting the highest level since 2020, it remains at historically low levels. At this point, it should be seen as healthy risk normalization.
Canadian Consumer and Mortgage Loan Delinquency Rate
The share of consumer loan and real estate-secured accounts at least 90 days past due.
Source: Equifax; CMHC; Better Dwelling.
Delinquencies for line of credit (LOC) debt has also seen a small pop from historic lows. The rate climbed to 0.43% in Q3, up from the record low of 0.41% in the previous quarter. Still very low, and one increase might not make a trend. However, it was the first increase since 2020, and the largest in a decade. Look at us, discovering new memories together.
Real Estate Debt Bucks The Trend… For Now
One segment bucking the trend (for now) is real estate secured lending. Mortgage delinquencies fell to 0.14% in Q3 2022, a new record low. Back in 2019, the rate was more than double this level, so this isn’t a normal amount of liquidity. It’s an unusually tight market where people just don’t default, which doesn’t mean what you think it does. But let’s come back to that.
The delinquency rate for home equity lines of credit (HELOC) also fell. Just 0.1% of accounts were delinquent in Q3, a new record low for the segment. This segment travels closely with mortgages, since they’re unique types of secured debt.
Unlike most types of loans, real estate delinquencies aren’t indicative of borrower health. If a market is booming, prices are rising and buyers will scoop the property within days. That means there’s little reason for a mortgage to become delinquent. A borrower in tough circumstances would liquidate before the 90 day mark. That’s why bubbles typically have low default rates.
That’s expected to change in the coming months, as the market changes. Home prices are now showing negative growth, and high rates have shrunk mortgages. As higher rates persist, a normalization of real estate delinquencies is likely. Just don’t expect a US-in-2008-style bloodbath—credit liquidity isn’t that tight.
One missed payment on any loan or line of credit including mortgage and auto loans is an immediate alarm bell for the credit bureaus and your credit score that for those that are over extended without the income to comfortable service the debt are doomed to a snow ball effect that will really cause financial ruin for those that are over extended and beholden to the banks as it is my opinion that the banks will not turn the other cheek and look the other way ? But in fact the complete opposite as it is financial law that banks produce all interaction to the credit bureaus regarding late payments regardless of reasoning .It is there responsibility to do so wich will lead to a snow ball effect where peoples scores are lowered while in need the most.
I find better living a bit on the negative in regards too debt and housing ! Maybe a bit on the negative aspects of things but if your reporting is correct the odds of a total reduction in access to credit is a complete possibility.
a change from around 1.7 to 2% ain’t much, especially when you look at the chart and see it’s been bouncing along in that range for a long time.
this is sensationalism, let’s not say the sky is falling till it’s around 10%
House’s are still unaffordable even at 500k with 5% rates or higher for the majority of working class families. So who will scoop these homes right back up again is the investors. So back to square one.
If you ever watched on youtube how the farmer set up a huge metal trap to catch the whole herds of wild boars together, it is the same situation happened here in real estate market, except the farmer being the bankers, the trap and the corn being the illusion of one would missing out if not entering and the cheap money, and the locked being the hot headed purchasers, deserved or not that deserved. Don’t forget we have the largest housing bubble in the world ahead of Singapore, a tiny city nation. Welcome to Canada.