The Q3 2018 TransUnion Canada Industry Insights Report (IIR) indicates that the positive trends we’ve seen in the Canadian consumer credit market over the last few years may continue. Despite a potential economic slowdown, the outlook remains positive, with continued opportunities for growth and balanced risk. However, both lenders and consumers should be aware of the potential impact an economic shock could have. We look at four key trends to watch in 2019—trends consumers need to be aware of, and prepared for, and lenders should monitor closely, if an economic slowdown occurs.
TransUnion’s forecasting models provide forward-looking insights for consumer credit balances and delinquency rates, and incorporate dozens of credit, behavioural and macroeconomic variables. The following four trend predictions are based on our analysis of this data.
The graphic below shows the projected change in serious delinquency rates on credit cards from Q3 2018 (serious delinquency is measured as 60 days or more past due for mortgages and 90 days or more past due for other consumer credit products).
Our research has shown that many consumers use a ‘hierarchy of debt’ to determine which product types they’ll go delinquent on first when they’re feeling the financial pinch. For most, repayments on auto loans and mortgages take preference over credit cards.
The anticipated economic downturn, albeit a mild one, explains the forecast of higher risk for increased delinquency rates on credit cards in 2019. We also expect credit card balances to rise, from the current $4,179 to $4,265.50 by Q3 2019, as consumers typically use this form of credit to make ends meet.
Although we don’t expect significant shifts in credit behaviour at a National level, there exists some potential for regional shifts in borrowing and delinquency due to localized economic events such as the impact of steel and aluminum tariffs on manufacturing, a continued decline in oil prices, and industry disruptions such as the closing of the General Motors plant in Oshawa. These events have the potential to affect specific sectors, which in turn, can affect local economies, and could result in a minor increase in overall delinquency.
As we saw in Alberta and Saskatchewan the during the last oil crisis in 2015, there’s generally an increase in unemployment and a long tail rise in delinquency as people struggle to pay down their debt. Again, this is something lenders in these regions will need to be aware of and manage.
In many metropolitan areas, new mortgage origination amounts reflect still-elevated home prices. We expect the average mortgage balance per consumer to increase as both consumers and lenders continue navigating the newly introduced (and stricter) mortgage qualifying rules and stress tests.
The graphic below shows the projected increases in the average mortgage balance per consumers from Q3 2018.
Tighter mortgage rules are likely to have some impact on rising delinquency rates during the next economic downturn. However, delinquency in the Canadian mortgage market is generally low, and the stress testing rules should help to reduce the impact of an economic shock.
Economic events such as interest rate hikes, unemployment, inflation and wages will have an impact on delinquency. The graphic below shows the projected change in serious delinquency rates on non-mortgage products from Q3 2018.
However, looking at consumer payment patterns, we continue to see a healthy spread of consumers paying more than the required minimum, particularly on their credit card balances—a positive indication that they will have some excess capacity to deal with an economic shock.
The 2019 forecast indicates a mostly positive outlook for the Canadian credit market, with continued opportunities for growth and balanced risk despite some potential economic challenges. Based on the above predictions, consumer-level debt will increase, while serious delinquency rates will decline on mortgages and increase only slightly on credit cards and other products.
The anticipated mild economic slowdown, however, is likely to affect both consumer spending and employment. As this would in turn constrain some consumers’ capacity to manage their debt responsibly, both consumers and credit providers would be wise to look at ways to deal with this in order to minimize potentially negative outcomes.