Canada’s household debt burden fell by a record amount in the second quarter as consumers slashed spending during the COVID-19 crisis and put a windfall of disposable income toward paying off debt and building savings.
The household debt load – more formally known as the ratio of credit market debt to disposable income – fell to 158.2 per cent from 175.4 per cent in the first quarter, Statistics Canada said Friday. In other words, Canadian households owe $1.58 for every dollar of after-tax income.
The debt burden is a closely watched metric for signs of financial distress. But despite economic hardship caused by the COVID-19 pandemic and significantly lower borrowing rates, a handful of factors have led to a less imposing debt ratio, at least for a short period.
“Over all, it appears that at least some households have taken the opportunity to pay down” their debt, said Toronto-Dominion Bank economist Ksenia Bushmeneva. However, she cautioned that recent progress could be short-lived. As income support fades and loan deferrals expire, “this is going to put pressure on household finances.”
After the pandemic hit, borrowing slowed considerably. At $2.3-trillion, the total amount of consumer debt was relatively unchanged from the first quarter. An increase in mortgage debt was offset by a decline in non-mortgage loans and consumer credit, which include credit-card debt and auto loans.
At the same time, emergency income transfers to households from the federal government more than made up for a loss of work income, leading to a 10.8-per-cent increase in disposable income. That helped drive the debt burden to its lowest mark since the opening quarter of 2010 – and its largest quarter-to-quarter drop on record.
There are, however, several headwinds that could send the debt burden higher again.
The Bank of Canada has signalled that its key lending rate (0.25 per cent) will remain low for years to support the recovery. Meanwhile, home-buying activity has quickly rebounded. Government income supports will continue into 2021, but at lower monthly payments, and the unemployment rate remains elevated at 10.2 per cent.
“The combination of low borrowing rates and hot regional housing markets could spur Canadians to ramp up borrowing,” said Priscilla Thiagamoorthy, a Bank of Montreal economist, in a note to clients. “That suggests the pullback in the debt ratio could prove to be temporary.”
Friday’s report showed the second-quarter household debt-service ratio – principal and interest payments as a percentage of disposable income – declined to 12.4 per cent from 14.54 per cent in the first quarter. However, Statscan noted this only measures obligated payments, and thus excluded loan deferrals.
Canada Mortgage and Housing Corp. said Thursday there have been 760,000 deferred or skipped mortgage payments at chartered banks, totalling slightly more than $1-billion a month. Six-month mortgage deferrals approved in March are beginning to expire this month, adding another potential strain to household finances.
On the upside, many Canadians have bolstered their rainy-day funds. The rise in disposable income, combined with a 13.7-per-cent drop in household spending, has resulted in a savings rate of 28.2 per cent. In recent years, it has plumbed the low single digits.
The Statscan data published Friday are aggregate measures of household finances, and thus obscure any hardship faced by families more negatively affected by the pandemic. The agency noted that debt-to-income ratios are typically higher for households in lower income brackets. “The data we’re seeing needs to be taken with a grain of salt, because not everyone’s experiences are the same,” Ms. Bushmeneva warned.
Personal insolvencies have fallen during the pandemic, in part because of disruptions to court operations and leniency from some creditors. That said, several economists expect insolvencies will rise this fall and into 2021 as new financial realities begin to hit pocketbooks.
“Losing your job and having a freebie period [on debt repayments] has lulled a lot of people into a false sense of complacency,” said Scott Terrio, manager of consumer insolvency for Hoyes, Michalos & Associates Inc., licensed insolvency trustees in Ontario. “They’re going to get whacked in the face in the next few months.”
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Matt Lundy