Canadian consumers are throwing up a warning sign, hidden in the numbers. Bank of Canada (BoC) data shows household debt growth accelerated in October. The growth drove total household debt to a new all-time high for the balance. Diving deeper into the numbers, only mortgages are seeing accelerated growth. Consumer credit growth, often seen as a sign of confidence in the economy, has dropped to a multi-year low. This is a big mixed signal.
Household Debt – The Good and The Bad
Is debt good or bad? It’s not always clear – mostly because it depends on who’s asking. If you’re a consumer, higher debt loads make you more vulnerable to economic shock. A minor hiccup in the economy, like a small recession, can be amplified by too much household debt. Think of it like getting in an accident, while not wearing a seatbelt. A sudden halt in movement, and the borrower goes through the windshield. More risk than necessary, can have catastrophic consequence.
When borrowing slows down without an event, it’s also not a great sign. Too slow of debt growth means consumers can’t or won’t borrow right now. This can be an indication that they’re swimming in too much debt already. Or it can be a sign that consumers aren’t confident in their personal future. Either way, the consumer is giving the economy a warning sign. Whether it materializes into an event, is dependent on how diversified an economy is at the time.
Too much debt isn’t great, and too little new debt isn’t either.
Canadian Households Owe Over $2.25 Trillion In Debt
Canadian households reached a new record level of debt, held by institutional lenders. Households had $2.25 trillion in outstanding credit in October, up $85.7 billion from a year before. This represents an increase of 4.0%, when compared to the same month last year. The growth level is actually higher than a year before, but breaking it down, we can see it’s concentrated.
Canadian Household Debt Outstanding, Percent Change
The annual percent change of total debt held by Canadian households, in Canadian dollars.
Source: Bank of Canada, Better Dwelling.
Over $1.61 Trillion of The Debt Is On Mortgages
Mortgage debt is where the majority of the balance is owed. Over $1.61 trillion of the outstanding balance in October is mortgage debt, up $68.7 billion from last year. This represents an increase of 4.5%, when compared to the same month last year. Substantial growth, and an acceleration from the month before. Consumers are confident about house prices at least.
Canadian Household Debt Outstanding In Dollars
Total debt held by Canadian households, in Canadian dollars.
Source: Bank of Canada, Better Dwelling.
Consumer Credit Growth Slows To Lowest Level In 4 Years
Canadian households just aren’t buying much else, other than property. Consumer credit represents the other ~$640 billion for October, up $16.9 billion from a year before. This works out to a 2.7% increase, when compared to the same month last year. That’s the lowest level of 12-month growth since January 2016. For those too young to remember, that was a month after Canada came out of its semi-recession, from the oil crash.
Canadian Household Debt Change
Annual percent change in debt held by Canadian households.
Source: Bank of Canada, Better Dwelling.
Canadians are borrowing and driving debt, but only in a single segment. Mortgages are growing, and by some measures at a pace faster than before B-20 Guidelines. However, consumer credit is grinding to a halt, giving us a bit of a mixed read. The divergence isn’t typical, and normally hasn’t lasted long historically.
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Something reflected in earnings from all of the banks. People won’t borrow, regardless of how much credit they extend to them. It’s really something else.
“Canadian banks are grappling with multiple issues, chief among them a reckoning for consumers, whose spending buoyed the country’s economy for years but who accumulated a mountain of debt in the process.”
https://www.ft.com/content/2519589e-16dc-11ea-9ee4-11f260415385
One debt that doesn’t show up in consumer debt is auto lease payments. In Vancouver metro nearly 70% of all vehicles are leased.
Leases are rent payments and not classified as a debt payment, but in reality they are still a household monthly debt that has to be paid.
When wages and incomes dont increase but housing costs sky rocket. Its a no brainer what will happen, young people spent more and drive more consumption. When housing bubble disapportionately benefit only older generation young people will not able able to spend more money. All are going to saving for down payment or mortgages. Boomers just keep their money in the bank while the young struggle. Time to bring down housing cost or face collapse of the economy.
I am not worry about the collapse of the housing market. Canada has a strong and innovative tech sector. Some says that Canada has a bigger manufacturing sector then China. Everything is fine. I just bought the latest cell phone made in Canada that is superior to Apple and Huawei. Everyone is talking about it. Go it now before everyone body else. This is going to be big, bigger then Apple. Plus Canada is about to build the most modern Ice breaker in the history of the world, better and bigger then the last Russian ice breaker.
https://thediplomat.com/2019/05/russia-launches-new-nuclear-powered-icebreaker/
This is not a sarcastic comment.
I’ll sleep better at night knowing that Canada is home to bright, articulate people like yourself.
Jesus at those debt charts. I have no non-mortgage debts, enough liquid assets to cover 50% of my mortgage balance, which is less than my gross income for the year (big bonus and other one-time income). Makes me wonder if I’m stupid for living beneath my means.