During October, Canadians filed the highest number of personal insolvencies in a decade, the latest sign that households are struggling to cope with elevated debt loads.
There were 13,200 consumer insolvencies in October, up 13.4 per cent from a year ago, according to new figures from the Office of the Superintendent of Bankruptcy. It was the highest monthly reading since a spike during the financial crisis of 2008-09. Thus far in 2019, the total number of personal insolvencies has climbed 10 per cent from the same period last year.
Moreover, all of the provinces are part of the trend: Over the past year, each one has seen an increase in personal insolvencies when compared with the previous 12-month period.
As such, rising insolvencies suggest many households are struggling to adapt to slightly higher interest rates, following a decade of easy money that saw Canadians gorge on debt.
“Insolvencies are not at crisis levels right now,” cautioned Ksenia Bushmeneva, economist at Toronto-Dominion Bank.
But she said the “noticeable increase” was puzzling given a strong labour market with near record-low unemployment rates and some of the largest wage gains in years.
Ms. Bushmeneva pointed to two factors at play: rising debt and the costs of servicing it.
Indeed, over the past decade, Canadian households have piled on $870-billion in debt, bringing their total to roughly $2.25-trillion. This coincided with central bankers slashing interest rates across the globe in a bid to boost economic growth with looser lending conditions.
But starting in 2017, the Bank of Canada embarked on a hiking cycle that brought its key lending rate to 1.75 per cent from 0.5 per cent. In turn, Canadians are spending more than ever on debt payments, with about 15 cents of every after-tax dollar going toward debt servicing.
Although the bank has held rates steady for more than a year, “those past interest-rate increases still continue to feed through financial channels,” Ms. Bushmeneva said.
Many forms of consumer debt have floating rates, meaning they get more expensive any time the Bank of Canada raises its rate.
Personal insolvencies began to ramp up in 2018 from relatively low levels, and with several of Canada’s largest provinces playing an outsized role. Over the past year, Alberta has seen more than 16,500 consumer insolvencies, up 14.9 per cent from the previous 12-month period. Ontario has registered a 14.4-per-cent increase, versus 8.9 per cent nationally.
(Insolvencies can take the form of bankruptcies or proposals, which are negotiated settlements with creditors to pay back a portion of the debt owed, extended the payment deadline or both.)
“My pet theory is a ton of this has been driven by the housing boom that we went through,” said Scott Terrio, manager of consumer insolvency for Hoyes, Michalos Licensed Insolvency Trustees in Ontario. “My clients are spending a massive proportion of their after-tax income to put a roof over their head.”
For those who file proposals, Mr. Terrio said creditors are subjecting them to more scrutiny.
“I can tell you that offering proposals to banks now versus two or three years ago is a whole lot different,” he said. “They're saying no to reasonable proposals and asking people for more."
Fortunately for consumers, there has been relief on borrowing costs, given a sizable drop in mortgage rates this year, while economists believe it’s more likely the Bank of Canada will cut rates before it hikes them again.
But questions remain around how households will react to more favourable conditions.
“To the extent that Canadians don’t go on a borrowing binge, [insolvencies] should steady,” Ms. Bushmeneva said. “But if again, they don’t do that, we might see continued pressure on insolvencies.”