‘This crisis is exposing our vulnerability’
Household debt adds uncertainty to country’s path
• Rising household debts are set to heap even more strain onto the Canadian economy in coming months, leaving the Liberal government to grapple with the difficult question of how and when to unwind its massive support programs, economists say.
Canada has for years held some of the highest household debt levels among developed nations, something in sharp focus amid the COVID-19 pandemic.
Prime Minister Justin Trudeau must now begin the “extremely complicated” work of tweaking and tapering his costly assistance programs in order to avoid a wave of defaults after those supports are removed, says CIBC economist Benjamin Tal. That will require a deft hand by Ottawa, in which programs may need to be extended, reduced, or otherwise tailored to meet individual worker needs.
“The debate now is not how much money to spend, but how to start withdrawing it,” he said.
Debt holders have enjoyed highly favourable interest rates for well over a decade, after the 2008 economic recession sent borrowing costs to record lows. But economic lockdowns aimed at curbing the spread of the coronavirus have sent unemployment rates soaring, putting renewed focus on high household indebtedness in Canada, even as rates remain low.
“This crisis is exposing our vulnerability, there’s no doubt about it,” Tal said.
His comments came after Evan Siddall, president and CEO of the Canada Mortgage and Housing Corporation ( CMHC), told a parliamentary committee on Tuesday that the country is headed toward a “debt deferral cliff” in coming months as mortgage payments come due.
Earlier this year, lenders began offering six-month deferrals on mortgages for families struggling to make ends meet.
The policy has provided temporary relief for some, but won’t reduce mortgage costs once the deferral period is over, at a time when many people could still be unemployed or working on a limited basis. If Ottawa at the same time begins winding down programs like its $2,000-per-month Canadian Emergency Response Benefit, or if people returning to the workforce on a limited basis are made ineligible for the support, mortgage stresses are likely to pile up.
“That’s where we’ll see income suddenly falling, and delinquency rates rising,” Tal said.
The CMHC expects that roughly 20 per cent of households could request deferrals on their mortgages during the pandemic, up from the current 12 per cent. The agency also estimates that roughly the same number of households, 20 per cent, could be in arrears if the economy does not substantially improve.
At the same time, Canadians have for years continued to heap on increasingly amounts of mortgage and credit card debt — a circumstance that economists and international organizations, including the International Monetary Fund, have repeatedly warned could put the Canadian economy at risk.
Household debt as a percentage of GDP has been on a steep climb over the past 20 years, rising from 58 per cent in 2000 to 99 per cent in 2019, according to the Bank of Canada.
The pandemic could push that figure as high as 130 per cent by the third quarter of this year, according to CMHC projections. By comparison, household debt as a percentage of GDP was 75 per cent in the U. S. before the pandemic, and 61 per cent in France. Household debt was among the top concerns repeatedly voiced by outgoing Bank of Canada Governor Stephen Poloz.
Charles St- Arnaud, chief economist at Credit Union Central Alberta, said high household debt levels are certain to have some sort of negative consequences in the face of such a widespread income shock, and after mortgage deferrals are lifted.
“Something will have to give,” he said.
Those debt strains will be particularly hard to navigate as the economy is reopened in gradual segments, leaving some workers both ineligible for programs like CERB, but unable to work full time. Many restaurants, for example, are likely to be operating well below full capacity, which will be passed down to servers, managers and kitchen staff.
Already, the average Canadian family spends about 15 cents for every dollar servicing its debt obligations. Roughly half of that, St- Arnaud said, goes toward interest payments alone.
“I think it’s a big risk for the Canadian economy going forward,” he said.
Even so, borrowing costs remain at very low levels, and are unlikely to rise in the near future as the economy retracts, according to economists. Savings among many families have also been uncommonly high during the pandemic, which will further drive down household debt risks. A few quarters of rapid GDP growth would substantially lower household debt ratios.
But there is still ongoing debate over whether interest rates could be on the rise in coming years, particularly after central banks around the world inject vast sums of money into the global economy.
“In the next year or two, I think the discussion will be deflation, not inflation," said Tal. "However, I think as we reach 2022 or 2023, there’s a risk, to some extent, of inflationary pressure.”