Since the beginning of the COVID-19 (coronavirus) pandemic, many Canadian industries have endured massive fluctuations in revenue and demand. Industries related to real estate, in particular, have experienced some of the most volatile conditions during the pandemic.
A paradigm shift
As companies began shifting to work-from-home setups in 2020, many Canadians began experiencing similar issues, namely the lack of space. This has resulted in people moving into larger homes or taking out a loan to renovate their existing living spaces.
Canadians’ mortgage debt reached $1.9 trillion in October 2021, 10.2% higher than in October 2020. Subsequently, the average household debt is forecast to rise an annualized 2.0% over the five years to 2021. This growing debt is driven by a rising housing price index and a plummeting overnight rate. An increasing housing price index makes homes more expensive, and thus, forces consumers to take out larger loans. Despite this, a falling overnight rate has made borrowing cheaper and encouraged many consumers to take out loans since interest rates have been near the zero lower bound in 2020 and 2021.
Although rising debt may be detrimental for certain risky borrowers, many industries have prospered from this period of increased lending. In particular, the Homebuilders in Canada industry and the Loan Administration, Cheque Cashing and Other Services industry in Canada.
As a result of low interest rates and growing demand for new houses and renovation projects, revenue for the Canadian Homebuilders industry grew an annualized 3.8% to $32.9 billion over the five years to 2021 (latest data available). Subsequently, the Canadian Loan Administration, Cheque Cashing and Other Services industry grew an annualized 7.1% to $1.5 billion over the five years to 2021 (latest data available).
In addition to rising household and mortgage debt, Canadian consumers have also endured increased debt regarding auto loans and credit card debt, along with any other type of personal debt. The overall Canadian consumer debt currently stands at $2.5 trillion in the third quarter of 2021, rising 7.5% from the second quarter of 2020 (latest data available).
Household debt to disposable income ratio
In addition to the increased risk of defaults due to expanding debt levels, a rising debt to income ratio also poses a threat to Canadian borrowers. As individuals have borrowed at a faster rate than their incomes have grown, their household credit market debt to disposable income ratio reached 177.2% in the third quarter of 2021. In addition, the annual change from the second quarter of 2020 and the second quarter of 2021 marks a 9.1% increase, which is the largest annual rise over the past decade. As Canadians’ household credit market debt to disposable income ratio increases, many people may not get approved for future loans.
Subsequently, due to the government stimulus in 2020 during the pandemic's peak, these decreased ratios can be mainly attributed to the influx of stimulus, which boosted consumers' income higher compared with the income lost during that period. As a result, the debt-to-income ratio fell substantially during the first two quarters of 2020.
As governmental support tappers off and interest rates likely increase, many Canadian borrowers may struggle to pay off their debts since an estimated $350.0 billion in mortgages will be affected by projected rate hikes in 2022. For consumers with variable-rate mortgages, each monthly payment will likely begin to cover less of the principal and will go to paying more interest. If this rise in monthly payments is unsustainable for consumers, they will be forced to default on their loans.
