Findings from our Q4 2020 report pointed to strong credit activity, an improved risk profile and ongoing resilience among Canadian consumers. While the credit market shows signs of good health going into 2021, recovery has been slow due to conservative borrowing and a low use of credit. Q1 2021 data indicates new credit growth has not yet returned to pre-pandemic levels. Although delinquency rates are down, lenders can focus on changing consumer behaviours that could result in a higher proportion of risky balances.
Increased liquidity reduces demand for most credit products
Originations and balances declined across most products and the number of credit-active consumers is relatively flat, down just 0.47% year over year (YoY).
A combination of reduced consumer spending, government subsidization and lender deferrals helped drive down revolving balances over the last year. Savings are now at 28% of disposable income1 — the highest ever — and we’re seeing a trend of using increased liquidity to deleverage non-mortgage debt.
This has been a significant contributor to lower, non-mortgage credit balances in Q1 2021 across all risk tiers. The average revolving balance per consumer decreased by 7.3% YoY, while credit card balances were down 16.5% YoY, and the total number of accounts with one or more credit cards dropped by 5.2%.
A combination of lower demand for new credit and tightened risk strategies from lenders contributed to decreased origination volumes across all risk tiers, but the decline was most pronounced in higher-risk consumers — down 27% from the prior year compared with a 12% decrease for prime and above consumers. This may be because lenders haven’t yet expanded their risk appetite to pre-COVID levels or simply aren’t engaging these consumers.
Mortgages are the exception
An active real estate market, greater demand for refinancing and record-low interest rates saw a 25.8% YoY increase in mortgage originations.
In March 2021, home prices had risen by 31.6% YoY and home sales by 76.2%. The average consumer mortgage balance increased to $112,000 (+5.7%). We expect this growth to continue through the second quarter of 2021 before tapering off due to lower demand.
Improving delinquency rates indicate resilience
The number of consumers making more than the minimum payment due on revolving balances grew 4% YoY.
As noted above, many consumers have used increased liquidity to pay down credit balances. Delinquency rates have dropped across all products. Consumer-level serious delinquency (90 days past due) dropped 63 bps YoY to 1.4% in Q1 2021, while consumer non-mortgage delinquency was at 1.39%, down 62 bps YoY.
Credit demand set to rebound
A number of positive trends imply an improved outlook for the credit market in the latter part of 2021 and beyond.
Consumers are performing better than expected following the end of deferral programs. Our latest Consumer Pulse survey shows consumer confidence is the highest it’s been in over a year. Lenders should therefore prepare to meet consumer demands as spending and borrowing return to more robust levels when lockdown measures ease and businesses reopen. However, changing consumer behaviours could result in a higher proportion of risky balances. To maintain a manageable delinquency rate, lenders can look at ways to build their portfolios with new balances and originations.
1 Unless otherwise stated, the source of the information in this release is from the TransUnion Canada consumer database.