Canada’s economy is slowing down and unemployment is rising, but that isn’t slowing credit consumption. Statistics Canada (Stat Can) data shows household debt continued accelerating in October. A combination of lower rates and moral hazard has led to aggressive borrowing, with credit now rising at a faster pace than GDP. It’s a questionable setup when the economy’s fundamental indicators are eroding.
Canadians Owe More Than $3 Trillion In Debt, Growth Is Accelerating
Canadian borrowing is once again ramping up as costs fall. Outstanding household debt climbed 0.3% (+$10.3 billion) to $3.01 trillion in October. The balance is 3.7% (+$107.3 billion) higher than last year, printing the fastest annual growth rate since June 2023. Even after adjusting for inflation, household debt is rising faster than GDP.
Canadian Mortgage & Consumer Debt Are Accelerating
The annual growth for household mortgage and consumer credit growth.
Source: Stat Can.
Canadian Mortgage Borrowing Returns As Home Sales Recover
Most household debt is traditionally mortgage credit, which was behind the monthly move. Household mortgage debt rose 0.4% (+$8.2 billion) to $2.24 trillion in October, a slightly faster rate than total household debt. That pushed annual growth to 3.6% (+$78.2 billion), the highest rate since September 2023.
Bank of Canada rate cuts are behind the return of mortgage credit growth. They didn’t introduce stimulus via increased credit capacity since fixed-rate mortgages were much cheaper even after the rate cuts. However, the cuts improved sentiment by creating a little FOMO, helping to boost existing home sales.
Canadian Consumer Debt Continues To Grow Faster Than Mortgages
Consumer (non-mortgage) credit had been relatively slow before 2020 but has since picked up and continues to rise aggressively. The balance added 0.3% (+$2.0 billion) hitting $776 billion in October, pushing annual growth to 3.9% (+$29.2 billion), the fastest rate since February 2023.
Consumer credit acceleration is being attributed to less optimistic circumstances. Experts have previously attributed the segment’s recent rise to the cost of living. Households are increasingly turning to consumer credit to make ends meet. A rise in credit card delinquencies and insolvency filings demonstrate the less-than-favorable circumstances.
Mortgage borrowers are also showing some signs of stress but there’s been a greater effort to mitigate lender losses in this area. Mortgage delinquencies are rising, but not to the extent many had expected. This is largely due to the extreme measures that Canada has asked lenders to adopt to mitigate mortgage delinquencies. Good news for over leveraged borrowers, at the expense of adding moral hazard.
Rising household debt can be good or bad, depending on the context. Falling rates are a form of stimulus, allowing borrowers to use their future income to pull their future demand forward. When it occurs at the bottom of the cycle and motivates more consumption, that’s a sign that the economy has found a bottom.
In the current economy, rising credit demand is happening while GDP is slowing and unemployment is on the rise. Rising demand and higher prices aren’t typically observed during economic erosion, potentially a red flag of mismatched incentives.
Add another trillion for private mortgages and that’s a heck of debt pile that GDP can realistically never outpace without significant write-downs.
Saw an estimate of private debt mortgages on here a while back. Any chance we can get an update in the new year?
Excellent point. The residential mortgage industry report, spring 2024 shows all MIEs about 1% delinquent 90 days or more in most provinces, Q4 2023 with chartered banks around 0.19%. They only seem to report the chartered banks.
When are you putting out more YouTube videos about how to qualify for big mortgages with small income? With the new 1.5 million dollar CMHC cap your how to instructional videos would be well received.
Canada should be asking more questions about the quality of mortgage bonds that were kicked back to the gov, and the BOC allowing off-balance treatment of certain types of facilities for short-term liquidity calculations.
This is far from a functional market.
This government’s entire economic policy for the last decade has been “a red flag of mismatched incentives. “
Why are borrers being rewarded? They can buy in todays money and maybe back in infated dollars. The reason this all works is the government wants savers to pay more tax by way of the value of their savings depreciating.
More relief is needed to support house prices.
Canadians depend on the value of their homes for retirement and spending cash. Bank of Canada, do what is right and drop rates to 0% to save Canada.
The economy is dependent on increasing house prices. The small 0.50 rate cuts so far are a good start but there is much more work to do. Drop by 1.0 in January at least.
We need negative interest rates asap. Inflating out of the mess is the only answer. Re-mortgaging will allow people to buy $100,000 electric cars from Ontario, lobster dinners from the East coast, new furniture made in Quebec and all of the things we desire. Also we can borrow for vacations to warm places in winter. It makes a big difference when you can borrow money for next to nothing. I remember having a mortgage costing me .25% – a variable in the Harper days. Good times could be back again as politicians are deathly scared of deflation and recession. Those are the best times for many.
This is the most troubling part of this article “ extreme measures that Canada has asked lenders to adopt to mitigate mortgage delinquencies”. Why is the govt having any say as to how banks deal with delinquent mortgages? The economy is far more healthy when it lets people fail and deals with the consequences. The economy should not be propped up through poor policy, especially a policy designed by this Liberal policy which has shown itself to be incompetent in its policy creation.
The fact that since 2020, rents have increased 20% to 30% while single-family house prices have increased over two and a half times should suggest the market is being irrational. The high cost of housing isn’t purely from a housing shortage. People are paying more for homes because they can, not because they want to. Clearly they are getting more money from lenders than they are adding to the economy, which isn’t a good sign for home values that are beginning to look inflated.
A lot of people could have hard times ahead if they find too much security in housing pessimism.
None of this will end well