Negative Rates Can’t Save the Canadian Consumer

A new report from RBC, highlights consumer insolvencies jumped a rather alarming 9.5% in 2019, the largest annual increase since 2008-09 during the great recession. This is a pretty thought provoking development when you consider that insolvencies are rising rather quickly despite record low interest rates and an economy at full employment. Not to mention massive monetary stimulus from the worlds global central banks. Here’s an update on real central bank interest rates across the globe:

So yes, Canadian insolvencies are rising in a pretty easy financial environment. This shouldn’t be overly surprising if you’ve been watching the household debt service ratio. It recently hit a new record high of 15% in Q3 2019. The last time household debt servicing costs were this high was in the second half of 2007 when the Bank of Canada’s overnight rate hit 4.50%. It is important, however, to distinguish that the rise in consumer insolvencies is largely concentrated in consumer proposals, or in other words, unsecured debt. This suggests its not homeowners hitting a wall, as further evidenced by the fact that just 0.23% of mortgages were more than 90 days in arrears as of August 2019, matching the lowest rate since 1990. Indeed there’s still plenty of liquidity for homeowners to cash out should they get into financial difficulty. However, it is evident that we’ve hit a cycle low in foreclosures, at least here in Vancouver. Here’s an updated chart on court ordered MLS listings across Metro Vancouver. They have been steadily growing over the past year.

Despite the Bank of Canada having a desire to curb the growing mountain of household debt, I still think they have little choice but to cut interest rates again- it will certainly be needed if they want to slow the rate of insolvencies.