Recession expected to cause unemployment rate to jump to 6.6% by 2024
For Canadian households with significant levels of debt, the pandemic provoked worries of financial catastrophe, but those predictions have not materialized.
Throughout that time, Canadians' financial situations got better, as indicated by rising net worth and strengthening metrics for consumer insolvencies, loan delinquencies, and debt service. That was aided by large-scale government assistance programs, such as CERB and CRB, and very loose monetary policy.
However, the household debt-to-income ratio ballooned past pre-pandemic levels by late 2021 due to the growing property market, which has accelerated the growth of mortgage debt. Since then, the situation has not changed.
According to a report by Robert Hogue and Michael Liu from RBC, inflation, rising interest rates, and the elimination of government assistance programs have all contributed to Canadian consumers' increased debt loads over the past year. As a result, more Canadians are falling behind on their debt service payments, despite the lowest level of mortgage arrears ever.
The percentage of customers who are 90 days or more behind on their debt service payments has increased for auto loans, lines of credit, installment loans, and credit cards.
Hogue and Liu projected more stress ahead from the current recession signals and toll of rising interest rates, with fixed-rate mortgage holders confronting higher monthly payments once their terms are up and debt holders with variable rate mortgages facing higher payments each month. Economic decline is anticipated, which will result in job losses.
By Q1 of 2024, they anticipate the national unemployment rate will increase from 5% to 6.6%. This has historically been a significant contributing cause to consumer bankruptcy and loan defaults in Canada.
RBC estimates that in the upcoming year, growing unemployment may undo half of the progress made in reducing mortgage delinquencies. In the medium to long term, the unemployment rate is also anticipated to trend upward from rising interest rates and debt servicing obligations.
Over the upcoming year, Hogue and Siu said Canadians' chances of becoming insolvent will likely increase due to those same factors. They expect the household debt-to-service ratio to spike by more than 1%, reaching a record high of 15.5% by the fourth quarter of 2024. Over the next three years, consumer insolvencies may spike by almost 30%.
Because of record levels of debt, they said, Canadians are now more vulnerable than ever to interest rate changes, and recent rate hikes will continue to put pressure on mortgage borrowers for years to come. This creates a significant concern in 2025–2027 for anyone who bought property between late 2020–early 2022, when the market was at its apex and borrowing rates touched historic lows.
The bottom line, RBC pointed out, was that the considerable improvement in Canadians' financial situation early in the pandemic was not permanent and now eroding in the face of a slowing economy and rising interest rates.
Although the environment is expected to remain difficult for years, they said a total breakdown is improbable.
