Low interest rates continue to drive consumer spending, and Canadians are accumulating debt at a steady pace.
All combined, Canadian households owed $1.94 trillion in the second quarter of 2016, up 5.1 per cent from the same period in 2015, according to a new research paper from RBC Economics.
Mortgage loans account for roughly 70 per cent of total debt, and there are signs of slowing. But consumer debt is picking up the slack.
Borrowing money is cheap, and Canadians seem to be taking advantage. Lines of credit, personal loans and credit card debt load has increased 2.6 per cent year over year. “Robust vehicle sales” have driven car loans to increase sharply since 2008.
But while consumers are buying that new car, those new shoes or fixing up the house with borrowed cash, they are leaving themselves at major risk.
“The ongoing rise in outstanding debt balances leaves households’ increasingly vulnerable to an economic shock,” the report says.
“Pockets of risks are emerging that warrant monitoring.”
One area of concern is the (slim but potentially disastrous) possibility of a housing market correction, particularly in red-hot Vancouver and Toronto. Another is that debt distribution is skewed — those already having a hard time getting by, often younger households, are gathering more debt.
“Highly leveraged households…are accounting for an increasing share of household debt,” the report says. “It is these households who are likely to bear the greatest burden in the event of an adverse shock such as a spike in unemployment.”
Overall, low interest rates are keeping “all-time” high debt loads manageable, the report says, and mortgage delinquency rates and consumer bankruptcy filings are stable.
But don’t count on it staying that way forever as Canada’s economy picks up steam, and interest rates inevitably rise, whenever that may be.
“Pressure on households’ ability to service current debt levels will intensify, albeit gradually, as strengthening economic growth prompts a gradual increase in borrowing rates.”