CIBC's Comments on Consumer Debt

National News CIBC Reports Household Debt Levels At Their Lowest Since 2001

National News

CIBC Reports Household Debt Levels At Their Lowest Since 2001 .
Friday, 28 January 2011 10:30

It seems that all the messaging about slowing down with the accumulation of debt is resonating with Canadians.

According to a new report released by CIBC, Canadian household debt levels are at their lowest levels since 2001.

The Household Credit Analysis Report states that inflation adjusted growth in household credit in the Q3 2010 reached the lowest levels in the past decade. Similarly, the 0.27 % increase in credit during November (the latest available data point) was the lowest monthly increase in 15 years.

"After coming through the most leveraged period of consumer spending in recent history, Canadians are getting the message that they need to cut back on their debt levels," says Benjamin Tal, Deputy Chief Economist at CIBC. "After rushing back to shop in 2010, consumers will take a well-deserved break in 2011. The softening in the monthly pace of job creation from an average of 31,000 in 2010 to 20,000 in 2011 will single-handedly slow growth in personal spending by more than 0.4 percentage points.

"But as important will be the change in the propensity to spend. With the U.S.-Canada saving rate gap at a 40-year high, and ongoing indications that monetary authorities wish to curtail the risky level of household debt, 2011 should see the beginning of an adjustment in the household balance-sheet."

Despite significant slowdowns in credit accumulation, the same cannot be said for mortgages- which are still rising by 7% year-over-year, although indications are that this trend is slowing down.

"A closer look at the monthly pattern reveals that the market is now growing by a monthly rate of only 0.4-0.5 per cent," says Tal.

“The reduced demand for mortgage credit is more notable among first time home buyers—a trend that is already visible in the brokerage channel. The recent changes to the market introduced by the Ministry of Finance recently are not significant enough to derail the market, but are sufficiently targeted to soften marginal borrowing. We estimate that the move to shorten the maximum mortgage amortization from 35 years to 30 years will cut the growth in mortgage originations by roughly two to three percentage points in 2011. Overall we expect mortgages outstanding to rise by close to five per cent in 2011 after an estimated 7.7 per cent increase in 2010."

According to the report, mortgage arrears hit their highest point in February 2010, and are now coming back down to earth. The arrears rate currently resides at 0.43 %—up from 0.24 % in early 2006.

Also on their way down are consumer bankruptcies- which are falling year-over- year by 25%.

"Our expectations that the housing market will stagnate in 2011 and might even see some softening in the second half, suggest that the estimated eight per cent rise in net worth in 2010 will not be matched in 2011. And with consumer spending dancing to the tune of changes in net worth this represents another source of slowing for consumers." concludes Tal.