Consumer debt rises sharply

90 days overdue; Delinquencies up as jobless households rise
Alia McMullen, Financial Post Published: Saturday, July 04, 2009

A growing number of Canadians have fallen behind on their credit and mortgage payments as unemployment rises, prompting a surge in consumer bankruptcies. It is a situation that is expected to get worse as unemployment continues to grow.

Canada's average delinquency rate for all types of consumer credit, excluding mortgages, reached 1.52% in May, up 19% from a year earlier, data compiled by Equifax Canada Consulting Solutions showed yesterday. The pace of growth accelerated from 13% in April. The delinquency rate is based on payments more than 90 days overdue.

"While we have seen delinquencies increase steadily since the beginning of the year, the rate of increase in the past three months has been significantly higher," said Nadim Abdo, vice-president of Equifax Canada.

He said the sharpest increase in the past year was in credit card and sales finance purchases, which increased by 38% and 58%, respectively.

"Such transactions typically represent the purchase of durable goods, such as furniture or electronics, and consumers appear to be willing to fall behind on them first before they miss payments on their bank loans and lines of credit."

Michael Gregory, a senior economist at BMO Capital Markets, said it was likely more than 150,000 households in Canada were experiencing some degree of stress in meeting consumer debt repayments.

"Canadian households were in relatively good shape with high debt levels, but still manageable. But the risk was always that if people started losing their jobs that it would be a lot harder to make ends meet because of debt payments," he said.

The unemployment rate reached an 11-year high of 8.4% in May. Mr. Gregory said the unemployment rate would likely rise to 9.3% by the first quarter of next year, causing a further increase in credit delinquencies.

Mortgage delinquencies have also risen. Figures released by the Canadian Bankers Association in April showed 15,628, or 0.4%, of all mortgages were in arrears, up from 0.26% in April 2008.

But the percentage of mortgage arrears remained below the 0.65% level hit during the 1990s recession when interest rates surged to about 14% and unemployment hit 12%.
Despite this, Derek Holt, chief economist at Scotia Capital, said consumer bankruptcies have hit record levels.

Consumer bankruptcies rose 31% to 14,455 in the year ended April, figures from the Office of the Superintendent of Bankruptcy show.

"As bad as the recession was in the early 1990s, today's bankruptcy picture is shaping up to be worse, even when properly adjusted for population growth over the years," Mr. Holt said.

amcmullen@nationalpost.com