There is good news about the average household’s debt burden as servicing costs fall but insolvencies are still set to rise
With the turbulence in the stock markets as the pandemic gripped the world, Canadian households were expected to see a negative impact on their wealth.
According to a new analysis of wealth and debt from TD Economics, Canadian net worth dropped 3.8% in the first quarter of 2020, taking the average from $309,735 to $297,266 on a per capital basis.
The biggest hit was from the value of financial assets which dropped 7.1% as nervous investors joined the pandemic-related sell-off. This blow was eased slightly by a 1.6% rise in the value of non-financial assets, mostly real estate and land which was buoyed by strong home prices and sales as the year began.
There was an increase in household debt, up 1.2% (seasonally-adjusted), mostly mortgage debt (up 1.5%).
Consumer credit growth slowed to 0.5% from 0.7% in the previous quarter. New borrowing was down 25% and originations for non-mortgage debt fell by 50%.
Debt servicing costs were down from 14.81% of disposable income at the end of 2019 to 14.67% in Q1 2020. Total payments were down 0.6% and this was partly due to payment deferrals, along with lower interest rates.
However, the debt-to-income ratio (DSR) increased to 176.9% from 175.6% as income growth slowed.
TD Economics said last month that the pandemic would leave a “lasting mark” on household finances.
Insolvencies to increase
TD economist Ksenia Bushmeneva’s analysis concludes that the growth in borrowing is likely to have slowed in the second quarter as consumer activity and home sales slumped.
It’s expected that the DSR will continue to fall as we move through the year as the deferrals trend remains.
While lower debt servicing costs will help household budgets along with government support programs, Bushmeneva highlights the difficulties that many households will face this year and expects a rise in consumer insolvencies, exacerbating a trend that was already evident at the end of last year.
But there is a positive ahead.
“Once the dust settles, households will likely emerge out of this crisis with higher saving rates, but also higher leverage, increasing the downside risk to the longer-term consumer spending outlook,” Bushmeneva writes.
