Road funding

Why cash-strapped Canadians may soon be pushed into bankruptcy

“Wickedly high.

This is how Doug Hoyes describes the amount of debt Canadians have. And he would know it: the licensed insolvency trustee spends his days working with people who are crumbling under debt, at a time when consumer insolvencies have reached peaks since the start of the pandemic.

Interest rates are rising, a recession is looming, and inflation is driving up the price of everyday consumer goods like groceries, which are now so expensive that some are skipping meals.

Economists say a debt crisis is brewing and is pushing cash-strapped Canadians, who are now carrying an individual average debt of $21,128, on the brink.

Already, for every dollar of income earned, Canadians owe $1.81 in debt.

“It’s going to continue to get worse,” Hoyes said, as more Canadians turn to credit to pay for their necessities.

Between new loans as demand for credit increases and higher inflation-related spending, consumer debt in this country — excluding mortgages — has soared to $591.4 billion. That’s an increase of more than five percent from the same time last year, according to a recent report from Equifax, a credit reporting agency that tracks credit scores and debt.

Total consumer debt rose more than 8% in the second quarter of 2022 — to $2.32 trillion — compared to the same period a year ago, according to the Equifax report. Overall, the amount Canadians owe on their credit cards is at its highest level since the fourth quarter of 2019.

The numbers are so alarming that Canada’s major banks are bracing for the worst-case scenario, setting aside millions of dollars in anticipation of a wave of defaults.

Equifax report revealed consumer insolvency – people who cannot pay their debt – has reached its highest level since COVID-19. Consumer proposals, a debt management method in which an insolvency trustee offers a lower payment plan to creditors, are up 20.7% from a year ago and account for 76% of all insolvencies.

These rising debt levels represent a marked change from the pandemic era, when non-mortgage debt such as auto loans and lines of credit fell by a record $20.6 billion, according to Statistics Canada, partly due to government support programs and a slowdown in non-mortgage lending. -essential expenses.

Hoyes, who is co-founder of debt advisory firm Hoyes Michalos, anticipates the situation to worsen as people see their mortgages become more expensive or see the cost of living continue to rise.

“Anyone can kind of bob and weave for a few months,” Hoyes said. “But with each passing month, more and more people are reaching the breaking point.”

The inflation factor

Inflation has fallen slightly, but that does not mean that the price of goods is falling. Canadians are overwhelmed at the cash register, and more are turning to food banks in addition to credit.

The inflation rate in August was recorded at 7%, according to Statistics Canada, compared to 7.6% in July, a slowdown largely attributable to the fall in gasoline prices.

Wages, while rising overall, have not risen at the same rate as inflation, which means the money is no longer going as far as it used to when it comes to covering the cost of the essentials.

Despite August’s lower inflation rate, grocery prices remained exceptionally high, with food inflation hitting 10.8% in August. According to Statistics Canada, this represents the fastest price increase since August 1981. This essentially means that the same food you bought a year ago now costs on average almost 11% more.

The high cost of living means that Canadians have largely reversed course on the progress they made during the pandemic in tackling the debt they had and are now seeking credit to fight inflation.

Demand for new credit cards has been higher than usual, said Rebecca Oakes, vice president of advanced analytics at Equifax Canada. And it’s people with lower credit scores whose card balances are seeing the biggest increase, Equifax data shows, indicating they’re likely charging small, daily purchases to their credit cards to meet the cost of high life, Oakes said.

Demand drives competition: Lenders offer higher limits on new cards: Average credit limit up $1,200 from same time last year. Overall, the average new card limit is over $5,800, the highest in seven years.

Financial stress increases as demand for credit cards increases

Credit card balances for people with lower credit scores saw the biggest increase in the last quarter, up 16.2% from the same quarter a year earlier.


Average total debt per consumer in the second quarter of 2022, excluding mortgage debt — a 2.4% increase from the same period a year earlier.


Average consumers charged their credit cards monthly in the second quarter of 2022, up 22% from the same quarter a year earlier.


Average credit limit on new cards, the highest in seven years.

over 100,000

The increase in the number of consumers who missed a credit payment this quarter compared to last year.


The pinch in interest rates

Canada’s debt problem is not just credit cards.

Many homeowners have taken out large mortgages, with some now facing inflated monthly payments due to ongoing rate hikes.

In an effort to calm inflation, the Bank of Canada has raised interest rates five times since March. The key rate is now at 3.25%, against 0.25% since the start of the year.

Julia Wendling, an economist at Rosenberg Research, said the higher rates mean homeowners will have to redirect more money to their mortgage, which will lead to lower consumer spending.

Wendling said his organization called for a pause in increases after the next Bank of Canada meeting in October. The housing market “has already started to collapse,” she said. “We believe this will continue, and it will eventually lead the Bank of Canada to realize that the Canadian economy, as indebted as it is, cannot sustain these higher interest rates.”

Other economists share Wendling’s concern.

“We are facing one of the largest single-year interest rate increases we have seen since the mid-1990s,” said Douglas Porter, chief economist and managing director of BMO Financial Group. Further hikes could mean Canada faces rate hikes not seen since the early 1980s, he said.

The pandemic boom in the housing market before rate hikes took hold led to a further rise in debt levels, largely due to the size of Canadian mortgages, Porter said. This comes with both good and bad news: while debt is healthier when held in the form of mortgages because an asset is attached to it, it is still at an all-time high as income share.

David Macdonald, senior economist at the Canadian Center for Policy Alternatives, told the Star that the danger of hikes lies in their longevity.

If the Bank of Canada continues to raise rates, more of the population will be exposed to further strain on their mortgages as more and more people renew their terms. (Currently most at risk are homeowners with adjustable rate mortgages and those currently in the process of renewing).

While large numbers of homeowners are unlikely to lose their homes to the added stress, “it’s more that there will be a wave of people becoming housing poor,” Macdonald said. “A lot more of their money goes to interest payments on their mortgages.”

The recession issue

It’s still unclear how badly the first economic downturn since 2007 will hit the country, but between the high cost of living and rising interest rates, the situation looks dire.

Wendling of Rosenberg Research said a recession is “almost guaranteed” given the Bank of Canada’s rate hikes. With less money available to spend overall, people are prioritizing essential costs first, which in turn pulls consumer spending out of the economy and drives down Canada’s GDP, he said. she declared.

“We think the contraction in GDP that we’re going to see is going to be a lot more negative than most people think,” she said. A contraction in GDP shows that economic activity has declined; if this happens for two or more quarters, it indicates that technically a country has entered a recession.

The earliest that could happen here is at the end of the year – if GDP growth is negative for the third and fourth quarters of 2022.

While some suggested a recession could prove mild, BMO’s Porter said it was too early to tell how it would play out. “You can’t know that a downturn won’t turn into something deeper,” he said. “The debt situation of our households leaves us vulnerable to further shocks that could result in job losses or further interest rate hikes.”

For its part, the Bank of Canada has always argued that high inflation in Canada justifies continued rate hikes, even if some economists say they will lead to a recession.

“The Governing Council remains steadfast in its commitment to price stability and will continue to take the necessary steps to achieve the 2% inflation target,” the bank said when announcing its increase in september.

By raising interest rates, the cost of borrowing should be so high that consumers balk at the price, spending less and lowering the cost of goods, reducing inflation.

But with an ongoing recession, the unemployment rate could rise as businesses look to save money. Faced with job loss, Hoyes said, people simply cannot pay off their debts.

In a nutshell, Hoyes said, “we have a big problem on the horizon.”


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