- Delinquency and insolvency rates rise: Overall consumer-level serious delinquency rate in Canada rose 37 basis points to 5.61% and insolvency rates were up 11.5%, compared to the same period a year ago
- Overall non-mortgage debt level stabilizing: Average consumer non-mortgage outstanding debt balances decreased slightly – down -0.5% YoY
- Canadian mortgage market heats up: The Canadian mortgage market showed a surge in origination volumes, up 17% from a year prior
A slowing economy and the 125-basis point interest rate rise in the second half of 2017 and into 2018, may finally be impacting Canadian consumer credit markets. The newly released Q4 2019 TransUnion (NYSE: TRU) Industry Insights Report shows that some Canadian consumers have started to feel the pressure of carrying debt, as the overall consumer-level serious delinquency rate (consumers with delinquent payments 90 or more days past due, including 12 month rolling charge-offs) rose 37 basis points year-on-year (YoY) to 5.61%. Delinquency rates rose for non-mortgage debt, driven by increases in installment loan delinquencies, during the most recent quarter.
Delinquency rates rose across all regions of the country, but some areas saw much sharper rises than others. Saskatchewan, Newfoundland and Manitoba saw the sharpest increases, likely due in part to impacts from trade embargos on agriculture. Mining and oil prices likely affected delinquencies in the prairies, and high unemployment likely affected borrowers in Newfoundland.
“We are now starting to see increased pressure on personal finances, especially within certain segments of the population that have a higher sensitivity to interest rate changes. Rate rises in 2018 may be beginning to squeeze household budgets and drive higher delinquency and insolvency rates, although other macroeconomic factors, such as the impact of trade embargos, auto plant closures and rail strikes, have also played their part,” said Matt Fabian, director of financial services research and consulting for TransUnion Canada.
Previous research from TransUnion showed that below-prime* consumers, on average, are more susceptible to payment shocks that result from events like increased interest rates, as well as from negative shifts in the economy such as unemployment. Newfoundland, which has the second-highest proportion of credit consumers considered below prime (40.0%), saw the biggest increase in delinquencies – up 73 bps YoY in Q4 2019 – and now has the second highest delinquency rate of all Canadian provinces, at 7.65%. Similarly, New Brunswick, which has the highest proportion of borrowers with below prime risk scores, at 40.2%, had the overall highest delinquency rate (8.6%) following a delinquency increase of 38 bps.
The non-mortgage delinquency measure encompasses a range of account types, including credit cards, lines of credit, auto loans and installment loans. However, the overall delinquency increase was not seen across all products, with much of the delinquency rise in the most recent quarter occurring in installment loans, which saw serious delinquency rates rise 45 bps YoY in Q4 2019. Meanwhile, serious delinquency increases were much smaller for captive auto loans and lines of credit, up 8 and 1 bps, respectively, while credit card delinquencies declined 24 bps in the most recent quarter.
|Ranking Consumer Delinquency Rates (90+ days past due) on Non-Mortgage Accounts by Province|
|Province – Ranked by Consumer Delinquency|
Rate (highest to lowest)
|Q4 2019 Consumers Serious Delinquent|
|1. New Brunswick||8.57%||38|
|2. Newfoundland and Labrador||7.65%||73|
|4. Nova Scotia||7.25%||58|
|7. Prince Edward Island||6.15%||49|
|8. British Columbia||5.71%||42|
Additionally, insolvency rates have continued to increase in Q4 2019, up 11.5% from the prior year and up almost 3% from Q3 2019. Insolvency growth appears to be driven by borrowers in near prime and prime risk tiers, who tend to have moderate credit risk but can struggle more with maintaining debt service in the face of negative external factors.
These segments may have been impacted by rising interest rates and cost of living increases which have stretched disposable incomes and in some cases forced consumers to prioritize which bills to pay. It is worth noting that the Q4 2019 rise in insolvencies was driven largely by an increase in consumer proposals, where a consumer agrees repayment terms with a creditor, rather than bankruptcy, which often involves only selling assets to meet a portion of debt obligations.
Canadian mortgage market heats up again
After a subdued 2019, the Canadian mortgage market appears to have adjusted to new mortgage qualifying rules enacted in 2018, with declines in mortgage rates over the first half of the year helping spur demand. New mortgage origination volumes in Q3 2019 increased over 17% from prior year volumes, led once again by Ontario (21%) and British Columbia (19%), which saw strong housing market activity. Some of this YoY growth may also be from favorable comparison to the subdued levels a year earlier, where the market was adjusting to the new mortgage rules.
Despite an increase in new mortgages issued (originations), average newly issued mortgage amounts saw only a marginal increase, likely reflecting compositional changes in the homes Canadian consumers purchased. Overall mortgage loan balances increased 3.4% nationally. Ontario led all provinces with YoY growth rates in average mortgage size of 4.8% driven by active markets including Hamilton, Ottawa and Toronto, with balance growth rates ranging from 5 – 8%. In contrast, British Columbia – specifically the Vancouver GTA – saw continued declines in average new balances, down almost 4% from the prior year.
“The 17% surge in mortgage origination volumes compared to the same period the year prior suggests the mortgage market has fully adjusted to the new qualifying rules. Although growth in the average newly-issued mortgage amount was generally subdued, Ontario showed a healthy 4.8% growth, suggesting house prices in the region are once again on the rise,” commented Fabian.
Overall non-mortgage debt level stabilizing
Despite rising delinquency and insolvency rates, TransUnion’s Industry Insights Report showed the level of average non-mortgage debt balances per consumer was relatively stable over the past year, decreasing slightly by -0.5% YoY to $30,106. This stabilization, paired with the increase in delinquency rates, suggests a combination of consumers slowing their level of new borrowings as they work to managing their existing debt, as well as lenders potentially pulling back from issuing new credit to consumers.
Fabian observed: “The stabilization of balances we have seen in Q4 indicates that some borrowers may be stretched to manage their current debt levels and other household expenses, and consequently are shying away from taking on new debt.”
As non-mortgage debt levels have stabilized, new account originations for many products has slowed. In Q3 2019 (the most recent quarter for which data are available), YoY originations for credit cards, auto loans and lines of credit all dropped, declining -7.6%, -5.5%, and -1.8%, respectively. Average consumer balances for these products were also largely flat in the most recent quarter. The one non-mortgage product with significant growth was installment loans, which saw an 8.3% YoY increase in originations in Q3 2019 and 4.1% YoY increase in balances. This may be an indication that consumers who are struggling with managing their household finances have turned to installment loans as a source of liquidity. As well, this continued growth in installment loans may be contributing to the increase in delinquency rates for this product over the past year.
|Q4 2019 metrics for major credit products|
|Credit Product||Q3 2019|
|Consumer Credit Cards||1,628K||-7.6%||$4,326||1.31%||2.80%||– 24 bps|
|Captive Auto Loans||256K||-5.5%||$21,348||0.88%||1.75%||+ 8 bps|
|Lines of Credit||392K||-1.8%||$35,070||-2.29%||1.06%||+ 1 bp|
|Installment Loans||865K||8.3%||$34,957||4.24%||4.46%||+ 45 bps|
|Mortgages||290K||17.2%||$276,852||4.11%||0.43%||– 2 bps|
(1) Originations are viewed one quarter in arrears to account for reporting lag.
(2) Serious delinquency rates are 90 or more days past due for credit cards and 60 or more days past due for all other credit products.
“While the economy has slowed, some core measures like inflation and unemployment remain very healthy and continue to bolster the market. However, continued economic headwinds, combined with soft wage growth, heightened global economic uncertainty and interest rate increases, may continue to cause some challenges. Against this backdrop, it is important that lenders have a deep understanding of consumer risk and potential repayment behavior. Advanced analytical models and the use of trended data can help give them the insights they need. There are clearly a number of interesting trends emerging and these warrant close scrutiny in the coming months,” concluded Fabian.
More information about the TransUnion Canada Industry Insights Report as well as details about a variety of credit products, can be found here. Among the details are more information about balance and delinquency trends, including for auto loans, installment loans, lines of credit and mortgage loans. Please visit the following website to register for TransUnion’s Q4 2019 Industry Insights Report webinar scheduled Wednesday, March 11th at 2pm ET.
*TransUnion CreditVision score risk tier segment definitions: subprime = 300-639; near prime = 640-719; prime = 720-759; prime plus = 760-799; super prime = 800+. Below prime considered any less than 720.
About the TransUnion Canada Industry Insights Report
TransUnion’s Canada Industry Insights Report is an in-depth, credit-active population-based solution that provides statistical information every quarter from TransUnion’s national consumer credit database, aggregated across active credit files on TransUnion record. These files contain hundreds of credit variables that illustrate consumer credit usage and performance. By leveraging the Industry Insights Report, institutions across a variety of industries can analyze market dynamics over an entire business cycle, helping to understand consumer behavior over time and across different geographic locations throughout Canada. Businesses can access more details about and subscribe to the Industry Insights Report.
About TransUnion (NYSE: TRU)
TransUnion is a global information and insights company that makes trust possible in the modern economy. We do this by providing a comprehensive picture of each person so they can be reliably and safely represented in the marketplace. As a result, businesses and consumers can transact with confidence and achieve great things. We call this Information for Good.® TransUnion provides solutions that help create economic opportunity, great experiences and personal empowerment for hundreds of millions of people in more than 30 countries. Our customers in Canada comprise some of the nation’s largest banks and card issuers, and TransUnion is a major credit reporting, fraud, and analytics solutions provider across the finance, retail, telecommunications, utilities, government and insurance sectors.
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Aabida Dhanji, Ketchum