It is no secret Canadian households are extremely leveraged. In fact, they are the most indebted in the G7. Except it hasn’t really mattered, since house prices apparently only go up, and nobody goes bankrupt anymore because central banks won’t allow it to happen. However, those beliefs are now being put to the test amidst a slowdown in home prices and economic growth.

Despite interest rates hovering near record lows, the debt servicing ratio for Canadian households actually reached a record high in Q2 2019.

Canada household debt service ratio
Canada Household Debt Service Ratio as of Q2 2019.

As a result, new data on consumer insolvencies (a lagging indicator) is finally rising. The number of consumer insolvencies (bankruptcies and proposals) for the 12 months to September 2019 increased by 8.5 per cent compared with the same period in 2018.

consumer insolvency growth
Consumer insolvency growth

Compared to 2018, the increases are more pronounced in Newfoundland (+14.8%), Alberta (+15.2%), Manitoba (+13.1%), Ontario (+13.4%) and British Columbia (+9.5%). While, Quebec (+1.8%), Nova Scotia (+6.2%), PEI (+3.2) and Saskatchewan (+1.6%) experienced more moderate increases.

This has propelled Canadian banks to begin shoring up reserves for increased credit losses. Overall, the top six Canadian lenders grew loan-loss provisions 27% year on year to C$2.45bn in the third quarter of 2019.

With a reduction in the ability to refinance existing debts, and increased restrictions from the B-20 mortgage stress test, Canadian households are piling into the alternative lending space in order to quench their thirst for more debt.

CMHC reported this past week that Mortgage Investment Corporation growth (private lending) has jumped 51% over the past two years. Meanwhile, Canada’s once defunct alternative lenders in Home Capital and Equitable Group are flourishing. Home Trust company reported its Alt-A residential mortgage volumes surged 19% year-over-year in Q3. This type of growth is indicative of consumers being kicked down the credit line.

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