Canadians are borrowing more, piling on consumer debt – credit cards, conventional bank loans, car loans and lines of credit. Numbers released this week show a number of troubling trends, from the consequences of low interest rates to why seniors are owing more.
PEOPLE ARE BORROWING MORE
Policymakers around the world are grappling with the low-for-long conundrum.
This is uncharted territory. And experts still aren't sure about the long-term consequences of interest rates that drop to record low levels, and then stay there indefinitely.
One obvious outcome is that people borrow more – a lot more.
In spite of generally tighter lending standards and badgering by Finance Minister Jim Flaherty, Canadians are still piling on debt, according to a quarterly report released Wednesday by credit bureau TransUnion. The average Canadian was carrying $27,131 in debt in the second quarter, up $200 from the January-to-March period.
Perhaps most shockingly, the figure excludes mortgage debt, which accounts for the lion's share of household debt in Canada. We are talking strictly credit cards, lines of credit, auto loans and conventional bank loans.
There was evidence earlier this year that Canadians' appetite for debt was waning. That apparently isn't happening. TransUnion now says it expects debt levels to continue to rise through the rest of this year, eventually reaching a new record high of nearly $28,000 by the end of this year.
And that's in spite of the fact that borrowing rates have begun to creep up in recent months.
- $27,131: Consumer debt – not including mortgage debt – held by the average Canadian, according to TransUnion
- 3.47 per cent: Increase over 2012
THERE ARE HUGE REGIONAL DISCREPANCIES
Debt levels are rising right across the country, but from vastly different bases.
The farther west you live in Canada, the more likely you are to have big debts, according to TransUnion.
British Columbians had the highest level of consumer debt in the second quarter at $38,672. Albertans were second at $36,150, and are now adding to their debts at the fastest rate in the country.
Quebeckers, on the other hand, are much less likely to borrow to fuel their spending. The average level of consumer debt in Quebec is $19,455, or slightly more than half of what British Columbians have.
- 7.7 per cent: Increase in average consumer debt in Alberta over 2012, according to TransUnion
- 1.84 per cent: Increase in Ontario
DEBTS RISE, BUT DELINQUENCIES FALL
This ought to be good news. Reports this week by TransUnion and Equifax Canada show that delinquencies rates on all types of loans are flat or declining.
That suggests that for now, at least, consumers are comfortably managing to handle interest charges on all that debt.
The key here is "for now." Interest rates have started to creep up, and that means that Canadians will have to pay more just to carry the same level of debt.
Stable house prices and a decent job market also help underpin borrowing.
The higher the rates go, the more Canadians will wind up falling behind on payments and getting into default trouble. Most lenders stress-test their loan portfolios to determine what customers will encounter trouble and at what interest levels.
So low delinquency rates are really a reflection of record low interest rates. When consumers borrow money at low rates, they're less likely to run into trouble.
Of course, the opposite is also true.
- 0.8 per cent: Increase in average credit card debt over 2012, according to TransUnion
- 2.73 per cent: Increase in average line of credit debt
- 5.52 per cent: Increase in average instalment loan debt
- 3.38 per cent: Increase in average auto loan debt
SENIORS' DEBT IS ON THE RISE
Consumers 65 and older are increasing their debt faster than any other age group in the past year.
Seniors, who typically should be drawing on savings in retirement, are instead borrowing to support lifestyles they otherwise can't afford. Some may also be borrowing to support both grown children and elderly parents.
This phenomenon is another consequence of the low-for-long phenomenon. With interest rates low, so are returns on the typical interest-bearing investments that many seniors depend on.
Many are apparently turning to debt to make up the gap.
- 6.5 per cent: Increase in average debt for consumers aged 65 and over, according to Equifax