CANADA HOUSEHOLD DEBT: HOW COVID-19 AFFECTED HOUSEHOLD DEBT AND IS THERE A LOOMING CORONAVIRUS DEBT CRISIS?

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canada household debt

Canada household debt:  Pre-pandemic debt pressures

Pre-pandemic, Canada household debt was continually increasing. The number of homes carrying debt has increased significantly over the last decade. In 2012, Statistics Canada reported that for the average household, Canadian households’ debt-to-income (DTI) ratio was 150%.  That means that debt was rising at a rate of $1.50 for every dollar of income. This was up from $1.10 or 110% the year before.  In the first quarter of 2020, the DTI ratio hit 175.4%. The ratio had been stuck at that level since about 2016.

This increase in debt can have a negative effect on a household’s bottom line — and the larger the debt, the greater the negative effect.  In this Brandon’s Blog, I discuss what has happened to Canada household debt during the COVID-19 pandemic.

How COVID-19 Affected Household Debt in 2020:  Canada household debt well supported by a temporary income surge

Whether you consider the federal and provincial financial assistance given to Canadians primarily through Canada’s COVID-19 Economic Response Plan as an income surge or not, findings released by Canada Mortgage and Housing Corporation (CMHC) in November 2020 show that the government assistance did help Canadians cope with Canada household debt.

The key findings in Canada in the CMHC report were:

• Q2 2020 Canada household debt ratio is 17% down from the Q1 ratio at 158%.
• The DTI ratio for home mortgage debt was also down, falling from 115% to 105%.
• These declines were a straight outcome of a boost in household disposable income.
• The degree of outstanding Canada household debt had not changed.
• On average, Canadian household disposable income grew by almost 11% between the Q1 and Q2 of 2020 and by 15% year over year.
• The government’s temporary transfer of money to Canadian families had the effect of decreasing the Canada household DTI ratio to a ratio not seen since 2010.

  

COVID-19: The second wave brought uncertainty on household debt

How Has COVID-19 Affected Canada Household Debt?  Around the time of the second wave, the COVID-19 pandemic had actually changed the family financial picture. The DTI ratio is a crucial indication of financial obligations as a vulnerability for primarily the financial real estate industries.

The Canada household debt-to-income ratio decreased in all significant Canadian cities in the second quarter of 2021. Under regular scenarios, such a decline would certainly indicate a general strengthening in families’ capacity to pay off financial debt. Federal government subsidies effectively supported the household lost income. This more than likely helped Canadians with lowering their non-mortgage debt throughout those months. Nonetheless, the mortgage part of Canada household debt has increased in the majority of metropolitan areas while employment has contracted.

At the same time, mortgage deferrals on mortgage payments offered by Canadian financial institutions stopped.  This of course leads to worries about the ability of Canadians to stay current on their mortgage payments, even with the current extremely low-interest rates. Other government assistance programs have already ended or are coming to an end. The end of the government support programs leading to the temporary boosting of household income now brings uncertainty as to how Canadians will be able to manage to carry and pay down their household debt levels.

Canada household debt:  Higher-income increases drive DTI ratios down

Statistics Canada also came out with an interesting report about the economic impacts of how COVID-19 affected household debt in 2020.  The key findings of the Statistics Canada report are:

• The gap between the lowest and highest income groups declined in 2020.  As you might expect, the reason was that lower-income families received a greater share of government COVID-19 funds than higher-income households.  Therefore, lower-income households saw more growth in household income than high-income earners, so, the gap closed.
• There was a more powerful rebound in disposable income for lower-income households as well as younger households.  Again, government coronavirus pandemic-related funds transfers are the reason why.
• Lowest-income and youngest families experience the biggest decline in wages and salaries.  As mobility restrictions, shutdowns and lockdowns took place across Canada, travel, food and beverage and the hospitality industries were hard hit because of closings for an extended period.  These industries provided employment for many lower-income people.  Layoffs resulted in declines in wages and salaries.
• The dollars of COVID-19 assistance doled out by the federal government surpassed the losses in employment and self-employment incomes suffered.
• COVID-19 support procedures have the biggest impact on lower-income and more youthful households.
• Families were able to reduce monthly expenses to the point where it was less than their monthly income from all sources to boost their savings and cash balances on hand in 2020.
• Lowest-income and youngest families saw the largest wealth gains.
• Low lending rates facilitated home buying for lower-income and younger Canadians.
• Lower-income families restricted their consumer debt balances on credit cards and other non-mortgage debt.
• Younger homes restricted consumer credit (non-mortgage) borrowing in spite of higher consumer spending.
• The biggest changes in DTI ratios occurred in lower-income and also younger families as opposed to higher-income households.

  

Canada household debt:  How will COVID-19 affect financial assets, delinquency and bankruptcy?

The Canada Emergency Response Benefit (CERB) supplied financial support to Canadians who experienced negative financial impact by the COVID-19 pandemic. Eligible Canadians obtained $2,000 for a 4-week period (the same as $500 a week), between March 15 and September 26, 2020. Roughly $82 billion was paid to about 8.9 million Canadians through the CERB program which ended in September 2020.  

The Canada Recover Benefit (CRB) sustains Canadians that have actually not returned to work as a result of COVID-19 or whose earnings have actually been reduced at the very least by 50%, and who are not eligible for Employment Insurance (EI). Eligible Canadians should be searching for work and accepting a job where it is reasonable to do so. The CRB gives $500 a week for up to 38 weeks. It is available only for 1 year. You make an application for the CRB for 2 weeks a time through your online CRA MyAccount. You have to wait until after you’ve missed out on 2 weeks of work to apply.

So the CERB is over. The CRB will get kicked to the CRB by this Fall. The Canada Emergency Wage Subsidy for support businesses continuing to employ people is supposed to end this June. Mortgage payment deferrals are over. Although during the first wave courts were closed so lawsuits were not advancing and at the same time collection agencies were not hounding people.

The courts have been open and litigation continuing for some time now. Over the last few weeks, people calling in to inquire about consumer proposals and personal bankruptcy have been saying they are getting calls from collection agencies looking for money, including, credit card debt payments. So pretty soon we should be back to business as usual as far as debt collection is concerned.

To date, as indicated above, COVID-19 has allowed Canadians in general to increase their financial assets and their rise in household net worth. As already described, for those lower-income families, the government support measures have actually had an increase in household income.

Delinquencies in Canada household debt have been ignored to a large extent in 2020 and bankruptcy filings were the lowest on record in 2020 in two decades. I expect that to change, as nobody is currently addressing any form of debt hangover. That is debts that people had pre-pandemic where no principal has yet been paid down and lenders have been understanding and therefore not pressing for collection. As collection calls increase, I expect that personal insolvency filings will also.

I expect that there will also be an increase in corporate insolvency filings. So far in Canada, most of the filings have been large retailers, certain cannabis companies and Laurentian University seeking bankruptcy protection in order to restructure under the Companies’ Creditors Arrangement Act (CCAA). As the economy gets better, companies will need to restart, hire more staff and generally gear up for an increase in business.

Companies will need capital to do so. Unless a company is sitting with a large cash balance, which for the majority is unlikely, they will need to tap into available lines of credit or do fresh borrowing. Lenders who have been understanding to date, may not wish to increase their exposure to certain companies or industries. If companies do not have the cash to operate, they will fail.

How will COVID-19 affect financial assets, delinquency and bankruptcy?  I will now provide you with some thoughts to consider.

Canada household debt:  Predictions and financial challenges for 2021

Canadians will be facing a great financial challenge as the economy rebounds from the economic impacts of the coronavirus. Canada’s economy pretty well made a sudden stop due to the COVID‑19 pandemic crisis.

This has actually caused extensive income losses, producing a tough scenario for many Canadian families.  This is especially true for those that are highly indebted. From a financial stability point of view, a key worry is whether homes can stay up to date with their financial obligation payments.  Highly indebted Canadians may very well end up in a financial crisis.

The COVID‑19 pandemic has a worldwide reach, and its aftermath is a lot more uncertain than how we recover from a normal recession. Economic activity will most certainly rebound as mandated lockdowns are gradually relieved. However, this will likely be a slow process, implying some of the macro-financial results of the pandemic might linger.

The Bank of Canada is worried about the 2021 financial challenges for all Canadians. To what degree can homes weather the storm? Canada’s central bank says that this eventually depends on:

• the financial wellness of households last February 2020;
• the efficiency of Canadian government support measures and policy activities targeted at the recovery; and
• the rate at which the labour market recuperates.

The Bank of Canada will be looking at many Canada household debt factors as the economy recovers.  Specifically concerning are the more financially vulnerable households.  Things that will give the Bank of Canada concern about household liabilities are:

• Mortgagors (the homeowners) with not many financial guardrails.
• Home equity credit lines can supply a financial reserve however at the expense of increased borrowing.
• Will government fiscal policy aid in supporting Canadians until household income can get back to or exceed pre-pandemic levels?
• Unemployment rates may not be a fully accurate indicator of household revenue losses.

Only time will tell how 2021 unfolds for Canadians and the economy.

Canada household debt summary

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We hope that you and your family are safe, healthy and secure during this coronavirus pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.