Remember the sub-prime causing America’s great recession of 2008? Well, now Canadians are on track to be subjected to a similar scenario in light of the average debt loads that they are experiencing. The International Monetary Fund warns Canada that it runs the highest risk of mortgage defaults among advanced economies, while other reports show Canadians are increasingly struggling with their total debt. There is little doubt that Canadians are now at the greatest risk of mortgage defaults. Many Canadians bought houses in the last decade because of lower than average mortgage interest rates, often as low as 1.5 percent annually. This despite the fact that in many urban areas the average cost of housing had reached record highs, sometimes increasing by 20 percent annually. Now, the average mortgage rate in advanced economies, including Canada, has risen to 6.8 percent in late 2022, more than doubling from the start of last year.
Canada’s household debt is the highest in the G7. A report by credit research firm Equifax Canada indicated that Canadian consumers on average are spending 21.5 percent more each month on credit cards, compared to pre-pandemic levels. It further noted that average monthly spending per credit card holder exceeded $2,200 this quarter, up about $400 compared to the first quarter of 2020. A significant number of Canadians are also beginning to default on mortgage payments and non-mortgage credit. A recent Angus Reid survey noted that three in ten Canadians say they are struggling to just get by, with far too many continuing to rely on the use of credit cards to cover their expenses.
Worst yet, the Bank of Canada may have to raise its rates in order to tackle the continuing high inflation rate. April’s inflation numbers took economists by surprise, ticking up to 4.4 percent from a year ago, instead of the forecasted 4.1 percent, in the first acceleration since June 2022. Further rate increases will only exacerbate the financial challenges that Canadians are now facing. In addition, inflation is hitting everyone hard and appears to be on the upturn for a number of necessities, such as food, fuel and housing, including rental accommodation.
While Canada’s financial institutions are in fairly good shape, recent difficulties of major banking institutions in the U.S. have made some Canadians somewhat more nervous. No one expects a run on the banks, but Canadians are increasingly putting investments into more secure and insured options. Fear is a deadly thing for the economy. Hopefully, our major banks will not see an inordinate number of loan defaults and those defaults on mortgages in particular.
Many Canadians were able to increase their savings during the pandemic, and it was expected that post-pandemic spending would eat into those savings. However, Canadians appear to have gone on a spending spree instead of paying off some of their existing debt. Now, because of high debt loads and the impact of inflation, they are caught in a financial bind with many struggling just to get by. Should a recession occur, it would only make the situation worse, especially if unemployment rates rise. Like a number of analysts suggest, perhaps it’s time to tighten our belts!
FROLITICKS 
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