RBC says household debt goes up from higher credit lines, car loans

 

In toronto real estate, Canadians’ non-mortgage debt loads picked up pace in the second quarter, putting households in an increasingly risky position, an RBC analysis suggested.

Balances on consumer loans including credit cards and lines of credit – grew by 2.6 per cent year-over-year, driven primarily by the continued popularity of lines of credit and auto loans. That was the first uptick in Canadians’ appetite for those types of loans in 18 months, RBC economist Laura Cooper said in the report.

In toronto mortgage, mortgage loan balances were up 6.2 per cent from the same quarter of the prior year as housing prices force many borrowers to take on bigger home loans.

 

The report begged the question: can consumer spending continue to drive the economy given that debt loads are so high?

Consumer spending has been the prime driver of the economy since the 2008-2009 recession, a trend that has occurred alongside increases in household asset values, as home prices continue to rise.

But total household credit grew by 5.1 per cent in the April to June period, following a quarter in which household net worth advanced at its slowest pace since 2009.

“The persistence of this slowing trend and any attendant wealth effect could have implications for the sustainability of the consumer to continue to drive economic activity, even in the absence of an adverse macroeconomic shock,” Cooper said.

“Should a shock materialize that leads to a housing market correction, the large run-up in household debt indicates a ‘more severe and longer-lasting’ decline in household consumption than would otherwise have been the case.”

 

Canadians households now owe a combined $1.94 trillion. A separate study by TransUnion found the average Canadian owed $21,580 in non-mortgage debt during the most recent quarter.

The percentage of both mortgage and non-mortgage loans coming from non-bank lenders –which usually come with higher interest rates and lend to riskier borrowers – rose about five per cent.

That highlighted the disparity in the risk faced by different kinds of borrowers in the event of an economic shock, RBC said.

“The distribution of debt across households has become increasingly skewed to those who have less capacity to cope with a shock such as ‘highly indebted younger’ households,” Cooper wrote.

“Moreover, with outstanding balances amounting to nearly $400 billion, highly leveraged households (as measured by debt-to-income ratios above 350 per cent accounting for an increasing share of household debt.”

 

Highly-leveraged households now comprise about 21 per cent of the market, up from 13 per cent before the recession.

The average household debt-to-disposable income ratio hovers around a historic high at 165 per cent, meaning Canadians owe $1.65 for every dollar of disposable income they have.

The Bank of Canada has warned about the risks of taking on too much debt in a low interest environment, which makes it cheaper to borrow money. It has cited the sharp rise in demand for auto loans as “another symptom of excessive borrowing.”

The central bank has also said that financial vulnerabilities surrounding the hot housing market are “elevated and rising,” particularly in Toronto and Vancouver.

Read the full post in Toronto Star