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Business Briefing Canadians are richer, taming their nasty credit habits, but defaulting more on loans

Briefing highlights

  • Where the Canadian consumer stands
  • Stocks, loonie, oil at a glance
  • CREA raises home sales forecast
  • U.S. retail sales rise
  • IEA cuts demand growth estimates
  • More warning signs from China
  • Required Reading

Where we stand

Several studies this week paint a picture of where Canadian consumers stand. Or fall, as the case may be, as loan defaults rise.

In a nutshell, Canadians are richer, we’re taming our nasty borrowing habits, though still juggling a high debt burden, we’re watching our spending, and more of us are defaulting on our loans.

“Even as the economy and the cold weather were not especially uplifting in Q1, the stock market rally at the start of the year and lower interest rates have likely put a smile on the face of some Canadians,” said Toronto-Dominion Bank economist Ksenia Bushmeneva.

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She was referring to Thursday’s quarterly report on wealth and debt from Statistics Canada. Add that to the other reports, and here’s the picture you get:

Wealth

Here’s the thing about wealth: Some people have it, and some people don’t.

So a national snapshot doesn’t really tell the full story.

Nonetheless, Statistics Canada’s Thursday report showed a “rebound in equity markets and more stable residential real estate values gave a nice boost to households’ assets,” noted Royal Bank of Canada senior economist Robert Hogue.

Household assets rose 2.2 per cent in the first quarter from the fourth, with worth up 2.7 per cent.

Looked at another way, net worth rose to 866.4 per cent of disposable income “as the stock market recovered from a plunge in the prior period,” added BMO Nesbitt Burns economic analyst Priscilla Thiagamoorthy.

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And still another way: Canadian households own $5.94 in assets for every $1 they owe.

Debt

A biggie, this, given the concern among federal and provincial policy makers who engineered a slowdown in credit growth via mortgage-qualification stress tests and measures to cool bubbly housing markets in the Vancouver and Toronto areas.

The key measure of household debt to disposable income declined in the first quarter to 173 per cent, according to Statistics Canada. A decline, yes, but still high.

Not only that, “this was fully expected as the ratio generally tends to drop in Q1, consistent with the cyclical slowdown in home sales which was more pronounced this year,” Ms. Thiagamoorthy said.

Seasonally adjusted, that measure stood at 177.6 per cent, which means we owe $1.78 for each dollar at our disposal.

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“But, that’s still under the record high of 178.3 per cent, suggesting we may finally be at a turning point as the decades-long borrowing binge continues to cool,” Ms. Thiagamoorthy said.

This also suggests that “policy makers’ efforts to deleverage Canadian households are starting to pay off – albeit those signs are still tenuous at this stage,” said RBC’s Mr. Hogue.

“More stringent mortgage qualifying rules and earlier increases in interest rates put the brakes on household debt, which grew at its slowest rate (3.7 per cent year-over-year) in a generation in the first quarter.”

Juggling our debts got a bit trickier, though, as the debt service ratio inched up in the first quarter to 14.9 per cent, Statistics Canada said.

That was a tiny increase from the fourth quarter’s 14.8 per cent, but, as TD’s Ms. Bushmeneva noted, it matched the prior 2007 peak “as growth in debt payments continued to outpace disposable income.”

Loan defaults

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Defaults are on the rise, according to Equifax Canada.

The delinquency rate for 90 days or more rose to 1.12 per cent in the first quarter.

And the evidence suggests seniors are having trouble.

“Seniors continued to lead the way higher with their 90-day-plus delinquency rate up 9.4 per cent compared to the same period in 2018,” Equifax said.

Still, the actual rate of delinquency was shy of 1 per cent among older folks.

Mortgage defaults also rose in the first quarter but are still “at very low levels,” Equifax said, pegging that 90-day delinquency rate at 0.18 per cent.

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“We continue to see signs of increasing strain for Canadian borrowers,” Bill Johnston, Equifax’s vice-president of data and analytics, said in releasing the report.

“The utilization of credit cards has been trending higher and gaining momentum,” he added.

“With more consumers growing their average debt, we expect to see further increases in delinquencies in the coming months.”

Spending

As TD’s Ms. Bushmeneva noted, there’s “a more cautious attitude to spending” among Canadians.

You can see this, too, where housing along is concerned, in the latest look at attitudes by Canada Mortgage and Housing Corp.

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CMHC found that 75 per cent of buyers in Montreal, Toronto and Vancouver “are not willing to take financial risks when buying a home.”

Of course, that still leaves 25 per cent.

While we’re cautious, CIBC World Markets senior economist Royce Mendes wonders if consumers may be getting a second wind.

“Faced with a number of headwinds, Canadian households limped into 2019,” Mr. Mendes said in a report on consumers.

“Higher interest rates were taking a bite out of retail spending, not to mention also weighing on housing demand,” he added.

“Tighter mortgage rules had sapped their borrowing power. And wages were barely keeping up with inflation by the end of the year. It’s no surprise then that Q4 2018 saw consumers post their weakest quarterly showing since the oil price shock ravaged Alberta’s economy four years ago.”

This year has been different, though, as “consumers roared back to life” in the first three months.

Job gains have been strong, and, as things stand now, mortgage rates won’t be as high as some had feared earlier.

Remember, too, that we saved a lot at the gas pump, though that’s changing.

And, for the second quarter, those savings could be offset from “an unlikely place,” according to CIBC.

“Amidst the ongoing Raptors-mania, Canadians are clearly splashing more cash than usual at bars, restaurants and hotels,” Mr. Mendes said.

“That’s good news for second quarter consumption numbers, but will almost certainly come at the expense of future spending,” he added.

“Indeed, it’s hard to ignore the fact that the average household savings rate over the past four quarters is the lowest since 1961, leaving little fresh powder from which to draw … As a result, expect to see restraint in the third quarter spending of some households, when all those credit card bills come due.”

When all is said and done, according to Mr. Mendes, it’s “difficult to conclude” that the run-up in spending is sustainable.

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Markets at a glance

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Ticker

CREA raises forecast

From The Canadian Press: The Canadian Real Estate Association is upgrading its forecast for 2019 home sales to show a slight improvement compared with last year rather than a decline. The association said home sales are now projected to edge up 1.2 per cent from last year to 463,000 units in 2019 compared with its previous forecast for a decline of 1.6 per cent this year. The updated outlook came as CREA reported home sales in May were up 6.7 per cent compared with a year ago, the largest year-over-year increase since 2016.

U.S. retail sales rise

From Reuters: U.S. retail sales increased in May and sales for the prior month were revised higher, suggesting a pick-up in consumer spending that could ease fears the economy was slowing down sharply in the second quarter.

IEA cuts demand growth estimates

From Reuters: The outlook for oil demand growth in 2019 has dimmed due to worsening prospects for world trade, the International Energy Agency said, although stimulus packages and developing countries should boost growth going into 2020. The IEA revised down its 2019 demand growth estimate by 100,000 barrels to 1.2 million barrels a day, but said it would climb to 1.4 million for 2020.

Huawei delays launch

From Reuters: Huawei will delay the launch of its much-touted foldable 5G Mate X smartphone by three months, the latest setback for the company that was slapped with U.S. sanctions last month.

More warning signs from China

From Reuters: China’s economy flashed more warning signs in May as the United States ramped up trade pressure, with industrial output growth unexpectedly slowing to a more than 17-year low and investment cooling, underlining a need for more stimulus.

Required Reading

Ottawa to freeze carbon tax

The federal government is vowing to freeze its carbon tax at $50 a tonne after 2022, as it moves to impose the federal levy starting in January on Alberta consumers following Premier Jason Kenney’s decision to kill the provincial one. Shawn McCarthy and Justin Giovannetti report.

Airline battle heating up

The battle for Transat A.T. Inc. appears set to heat up as Montreal real estate investor Group Mach Inc. submits a formal offer for the company that is still in talks for a friendly takeover by Air Canada, Eric Atkins writes.

Fee-savvy?

Can you tell the difference between the management fee for an exchange-traded fund and the management expense ratio? Rob Carrick offers this quick test to see how fee-savvy you are.

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