A recent report released from Equifax shows that when it comes to the amount of Canadians that default on loan payments, we can rest easy in the knowledge that we’ve gotten the number back down to pre-recession levels. However, with the amount of debt we continue to take on still rising, and our household debt sitting at historically high levels, is this news about defaults something to celebrate?
Well it is, because it shows that things could be worse; and that Canadians, while taking on more debt, are less likely to be able to pay it off. The fact that we’re not defaulting, or at least defaulting at slower rates, means that we may be able to afford the debt we’re taking on. At least in some part. However, the same Equifax report showed that the amount of non-mortgage debt we’ve taken on during the third quarter, has also gone up when compared with the third quarter of last year.
As you can see from the above chart, the amount of non-mortgage debt incurred by Canadians increased by a percentage of 1.8 per cent in the third quarter of 2012 when compared with the third quarter of 2011; but that the amount of delinquencies and defaults has been reduced to 1.22 per cent in 2012 from 1.37 per cent during the same quarter last year. Out of all the debt Canadians incurred, auto loans once again jumped the most to 9 per cent.
Nadim Abdo, vice-president of consulting solutions at Equifax Canada, says that this could be a good sign. “This ultimately is a good measure of how people are servicing their debt. Debt is increasing at a slower rate, the actual delinquencies are improving, they’re going down. That to me actually shows responsibility of some sort.”
In total, the report also showed that non-mortgage debt grew to $489 billion in the third quarter, from $484.7 billion in the second quarter. While auto loans are the category that grew the most, credit card balances actually decreased. That would suggest good news overall, as this is some of the costliest debt that could hurt borrowers even more. However, Mr. Abdo says that HELOCs and other lines of credit grew at the same time, suggesting that borrowers are in fact not borrowing less but rather, borrowing smarter.
“The drop in credit cards could be a deleverage rather than just transferring them somewhere else,” Mr. Abdo says, showing that there might be some hope. “You could actually argue that people are paying off at least a bit of their credit card debt now.”
He also says that the credit card debt that is being accumulated now, seems to be coming from cards that consumers had from past years; and that the numbers show that people aren’t continually applying for new credit as they once were.
“People who are using credit are using their own credit facilities that they have, versus applying for new ones like they were back in the heyday,” he says.
But the news isn’t good by any stretch. We’re simply still far too deep in debt than we should be; and if the U.S. reaches its fiscal cliff and gets plunged back into a recession, Jim Flaherty has already said that Canada would most likely follow. If that happens, we may not be so lucky next time around. Especially if it were to happen while our household debt ratio sits at 163%.
That’s because, when the last recession hit, Canadians were doing okay, and our consumer spending was able to largely support the economy while other profitable areas, such as our exports, faltered. Earlier this year though, Moody’s Analytics stated that the same consumer spending would not be available if we were to enter another recession.
And that means that we could be facing some serious trouble, despite the fact that we saw fewer delinquencies this quarter.