Debt may have less impact on Canadians than in past

Canadians are expected to spend more and borrow more in 2021, but they may be less vulnerable to debt than they were before the pandemic, says a new analysis by RBC Economics.

So how does that work? Our mountain of household debt has long been identified as a worry by everybody from the Bank of Canada to international watchdogs such as the Organisation for Economic Co-operation and Development.

Last year Canadians piled on $118 billion more in mortgage debt, almost double the increase of the year before. But while that debt is now higher than before the pandemic, the share of household disposable income going to debt payments has dropped, say RBC economists Nathan Janzen and Claire Fan.

The reason for that is lower interest rates, government income supports and payments deferrals for about three million borrowers over the summer and fall.

Though deferral programs have mostly ended, the Bank of Canada has signalled it will keep rates low and government support will likely continue until the labour market begins to recover. “We expect debt payments to remain manageable under these circumstances,” said the economists.

If the recovery picks up steam and rates rise faster than expected, it could have a bigger impact on households than in the past because debt levels are higher.

But the mix of debt has changed during the pandemic, with more of it in mortgages, which are less sensitive to rate hikes.

The report finds that five-year fixed-rate mortgages made up almost half of mortgages by late last year, up seven percentage points from early 2019. “That means it would take time, years in many cases, for higher interest rates to flow through to actual household borrowing costs.”

Moreover, soaring home prices have meant asset values have risen faster than debt levels. Household real estate assets rose $400 billion in the third quarter of 2020, from the year before — more than four times the rise in mortgage debt over the same period, the report said.

Canadians are also using the money they are saving during lockdowns to pay down more expensive debt, such as credit cards. Outside of mortgages, household debt decreased in 2020, with credit-card debt declining 14 per cent ($12.8 billion) by year end, compared to pre-pandemic levels.

However, “concern remains that there are households caught in the middle,” the economists say.

Higher-income earners have been less affected by job losses during the pandemic and are saving more. Lower-income workers, hit hardest by job losses, have received significant support from government income programs.