Canadians owe their repayment ratio declined in the first three months of the coronavirus outbreak, but an unexpectedly brighter debt picture could mask a wave of bankruptcies waiting to emerge.
Statistics Canada reported Friday that the debt-to-income ratio fell to 158.2 per cent in the three months between April and June, compared to a reading of 175.4 per cent in the first three months of the year.
This means that Canadian households owe $ 1.58 for every dollar they have had to spend as of the end of June. That proportion peaked at 177 percent in 2017 and has stabilized in the 170-th range until the surprising decline this year.
While it is encouraging to think that Canadians will be able to pay off their debt burden during the pandemic, Scott Terreux, insolvency secretary at Hoyes & Michalos, says that number could be mislead about what is happening beneath the surface.
Before the start of the pandemic in March, consumer bankruptcies had been growing at a double digit rate since the start of 2019 as the system worked during a decade of debt fueled by a low rate Terio said people were “indulging in” and kicking can down the road.
Then like almost anything else, bankruptcies came to a halt starting in March. Part of that is because the courts have closed, making it difficult for debtors to take legal action to recover their money.
But the massive wave of subsidy programs launched by governments across the country appears to have had a determined effect on keeping people’s heads above water, too.
While the record number of layoffs affected income, many people who were in trouble before COVID-19 felt some relief just because they weren’t spending as much.
With nurseries closed and parents moving to work from home en masse, Terio said, “Suddenly, people weren’t paying $ 2,000 a month in daycare for five months.”
In addition to the government stimulus, one in six Canadian homeowners who have mortgages have applied for programs that banks have offered to delay all or part of payments for up to six months this spring. But these programs are due to expire in the coming weeks, and those bills must be paid.
“The people I fear for are those who have large debts and then one of the spouses has stopped working,” he said.
“They took advantage of the postponements and the benefits [but] This journey will end. “
Savings rose sharply, too
Finally, Canadians owed $ 2.3 trillion at the end of June, which consisted of $ 1.5 trillion in mortgages and $ 779.4 billion in consumer debt such as credit cards.
“Statscan figures show that the debt picture is uneven across different income groups. The lowest 20 percent had a debt-to-income ratio of 281.7 percent at the end of 2019, which means they are owed roughly $ 3 for every dollar they have to spend at the same time. , Those in the top 20 percent owe only $ 1.38 per dollar of disposable income.
These imbalances are part of the reason Terrio predicted that bankruptcies would return “with a vengeance” in the coming months.
He said, “Once the courts are opened, you will discover how much you love your bank.”
Tsunami deflection
TD Bank economist Ksenia Pushmeneva found grounds for optimism in the numbers.
“One of the main risks heading into this epidemic-induced recession is the high level of household indebtedness in Canada, which could greatly amplify the damage to the economy and slow the subsequent recovery,” she said.
“So far, it appears that the consumer side of the economy has held up better than expected at the start of the crisis.”
Pushmeneva was particularly encouraged by the fact that the debt service ratio – the amount of money spent servicing debt loads – fell by its highest amount ever, to 12.4 percent from 14.54 percent, largely due to lower rates.
In addition, she noticed that the household savings rate – the percentage of disposable income that households were able to save – rose from 3.9 per cent at the end of 2019 to 28.2 per cent in June, a level she described as “surprising.”
But she is also concerned about what might be getting down the pipeline.
“The unprecedented federal government income support programs and deferrals by financial institutions were of the utmost importance to averting the tsunami and safeguarding families’ finances,” she said. However, there are likely to be more difficult times.
“Defaults and consumer insolvencies are likely to start rising at the end of this year and into 2021.”
