Non-mortgage debt keeps piling up

Canadians are continuing to heap on non-mortgage debt, despite warnings about the perils of cheap borrowing from top officials, according to a consumer credit study released Thursday.   

Equifax Canada's quarterly consumer credit trends report found that consumer indebtedness, excluding mortgage debt, grew 3.4 per cent year-over-year in the first-quarter.   

New loans opened during the quarter were up by about one per cent.   

The biggest increase in outstanding balances was for auto finance loans and leases, which grew by 10 per cent from the first-quarter of 2011.   

Mixed messages

"Interest rates are still obviously very low so people are still borrowing, but I don't know if it's a good or a bad news story," said Nadim Abdo, vice-president of consulting and analytical services at Equifax Canada.   

"It is not surprising to see consumer credit continue to increase given the significantly improved levels of consumer delinquencies and bankruptcies witnessed in the last year, coupled with record-low consumer borrowing rates."   

Since the recession, the Bank of Canada has kept interest rates low to stimulate the economy. The central bank's current overnight lending rate — which affects prime rates at banks — is one per cent.   

However, the plan to get consumers spending comes with a consequence that could spell economic trouble in times ahead.    With household debt at an all-time high above 150 per cent of income, the Bank of Canada has declared it the number one domestic risk to the economy.   

In a recent interview, bank governor Mark Carney lamented the comfort level of Canadians with high debt, attributing it to the illusion of affordability at a time of sky-high home values and floor-low interest rates.   

'There's no deleveraging, Canadians are increasing their debt —Equifax's Nadim Abdo

If house prices fall, however, Canadians could find themselves in a situation where their net assets decline as interest rates and hence their mortgage payments rise. Even a return to normalized rates would render 10 per cent of households financially vulnerable.   

In signs that consumers may be improving their overall credit situations, credit card debt decreased by 2.1 per cent year-over-year, continuing a downward trend for the past six quarters, while consumer bankruptcies have decreased by 3.1 per cent since the same period last year.   

The consumer credit reporting agency said its new credit seeking index shows that demand for new credit by Canadian consumers is about three per cent less than it was just before the financial crisis of 2008.   

Equifax Canada calculates the number of consumer credit applications in a given period of time compared to 2007, which is the timeframe considered "normal."   

"There's no deleveraging, Canadians are increasing their debt," Abdo said.   

"(But) they're not applying for new credit as much as they had in the past because I think what's happening is since we're seeing an increase in indebtedness, people are using the lines of credit they had before ... they're being smarter about how they spend their money because they have the facilities to do that."   

It's hard to know, he said, whether those people still taking on debt will be able to service it when interest rates rise.    Consumer lending is a cornerstone of Canada's banks, accounting for 27 per cent of their assets and 26 per cent of revenue, PwC said, adding that the largest driver of the personal lending market is real estate lending in the form of mortgages and home equity lines.