Rising Insolvencies & Rising Home Prices?

The Canadian debt story is getting lots of attention again in recent weeks. The buzz comes after recent data shows consumer insolvencies jumped 19% from a year earlier, the biggest annual gain since 2009. So far in 2019, there have been 102,023 consumer insolvencies, the second-most for the first nine months of a year in records dating back to 1987. It’s a rather perplexing stat given interest rates remain frozen at just 1.75% (below the rate of inflation) and the labour market still appears quite strong. However, the over indebted Canadian is a story that has been dragging on for over a decade. It appears, rubber is finally hitting the road- so to speak. The household debt service ratio recently printed a fresh record high- again despite incredibly low interest rates. A recent report from CIBC, helps shed some light on the recent surge in insolvencies. While CIBC cautions, on a per-capita basis, we’re neither climbing as steeply nor as far as in the last recession, there is, however, no question the genie is out of the bottle.

Consumer insolvencies are highest in Alberta given their economic issues, but are growing at a concerning pace across the majority of Canadian provinces. This begs an important question, why are households struggling with payments in the absence of a material weakening in the national labour market? The answer lies in looking at precisely which credit products are experiencing rising write-off rates. The bulk of the problem is in those products where interest rates were being reset with increases in prime tied to Bank of Canada rate hikes in 2018.

While there is lots of chatter about a housing recovery and forecasts for higher house prices in the year ahead, the current environment of rising delinquencies, weak retail sales, and a contraction in the labour force certainly doesn’t support that thesis. Which ultimately begs the question of whether or not a housing recovery can truly be sustained? In order for the recovery to be sustained it seems obvious the consumer will need support from the Bank of Canada through various rate cuts.. Don’t rule that out in 2020.