Credit lines, car loans fuel increase in personal debt

Canadian households now owe a combined $1.94 trillion

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

Balances on consumer loans — including credit cards and lines of credit — grew by 2.6 per cent year-overyear, 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. Meanwhile, 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 2008-09 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 longerlasting’ decline in household consumption than would otherwise have been the case.”

Canadian households now owe a combined $1.94 trillion. A separate study by TransUnion found the average Canadian owed $21,580 in nonmortgage 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 5 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.

Consumer spending has been the prime driver of the economy since the 2008-09 recession