The growth in credit has slowed dramatically in Canada as Canadians become more cautious about their personal finances in these tough economic conditions. With bankruptciess on the rise, a CIBC World Markets report has showed that the pace of household credit growth has almost halved in the last six months.
With the slowing of credit growth, Benjamin Tal, a senior economist at CIBC responsible for the preparation of the report has stated “There are clear signs that the household credit market is slowing at an accelerated pace.”
While the growth of credit has slowed, the total amount of consumer credit has risen about 10 percent from what it was one year ago. However, recent trends clearly indicate that credit growth is slowing and things such as mortgage sizes dropping by 5 to 10 percent.
Mortgages usually account for a large portion of household debt. The slowing of the mortgage market and softening house prices have resulted in the decrease of credit debt associated with mortgages. This is reflected in the new home loan growth where growth of credit in that area has dropped from 0.9 percent in mid-2008 to about 0.5 percent now.
One significant shift in the credit industry is the increase in mortgage arrears. This rate has increased from 0.24 percent in 2007 to 0.33 percent now, the highest mortgage arrears rate since 2003. According to Mr. Tal, “The likelihood is that this rate will continue to climb over the next 6 to 12 months.”
The report found that non-mortgage consumer credit was increasing by approximately 9 percent on a year-over-year basis. This was down from near 11 percent just one year earlier.
Credit card borrowing is expected to show signs of a decline as both the supply and demand for credit cards drops. Another key indicator for the credit industry is the increase in credit card arrears, which seen the aver loss rate associated to credit cards increase in the third quarter of 2008 to an annualized rate of 4.53 percent. This loss associated with credit cards is still low when compared to other countries such as the United States where credit card losses have risn to 6.7 percent.
The debt-to-income ration, while it is still growing, has slowed, sitting currently at 130 percent, down from 136 percent a year ago.
There is no doubt that credit problems have attributed to this and there are more key indicators showing the the crisis in the credit industry is not showing any signs of slowing. Bankruptcies have risen by 13.5 percent in 2008, with Alberta leading the country. It is more likely that bankruptcies will continue to rise as unemployment rises. Currently, there are almost 3 in every 100 Canadians filing for bankruptcy.
How bad will the economy turn and how will this affect the credit industry? The effects of the credit crisis was delayed somewhat in Canada, but it has now hit square on the shoulders of Canadian consumers. Credit will once again become a priviledge, not a right!
