Economy: The easing of consumer credit

It appears Canadians are heeding the warnings about high household debt and are taking a more prudent approach to spending. For the year ending Feb. 29, growth in consumer credit slowed to its lowest rate since 2002, likewise slowing the accumulation of household debt.

Perhaps, it is the threat of higher interest rates as early as this fall (Knowledge Bureau Report, April 25); maybe it is a response to Bank of Canada Governor Mark Carney's repeated musings, but Canadians are "hunkering down,î in the words of TD Bank Group economist Francis Fong.

Consumer credit ó which includes unsecured lines of credit, home equity lines of lines, personal loans and credit cards ó grew by 2.3% year over year. Consumer credit outstanding actually declined in March, CIBC economist Benjamin Tal reports in Household Credit Analysis. As well, growth in lines of credit has steadily declined over the past three years, coming in at 5% increase this year vs. a 21% increase three years ago. The amount of credit card lending has actually declined by 6.6%.

"The moderation in debt accumulation,î Fong notes, in a report entitled Are Canadians Prepared for Higher Interest Rates?, "speaks to a more cautious approach to consumer spending. Indeed, retail sales growth has decelerated in lockstep, with the slowdown being felt mostly in non-discretionary areas.î

Canadian households are continuing to spend, he adds, "but an increasing number simply do not hold a balance on their cards.î

The one source of credit that has stayed constant for the past three years is residential mortgage credit. It has grown at a rate of 7% to 8% a year and there is no indication of that changing. Both Fong and Tal point to "substitutionî in which credit card and other forms of debt are replaced by lower-priced mortgage debt. But there is also a robust housing market ó the average price of an existing house has grown by about 30% in the past three-plus year, says Fong ó keeping mortgage credit growing at a brisk pace.

If housing prices gradually soften by about 10% over the next two year, as Tal suggests, the growth in mortgage credit will likewise soften.

So, will Canadians be in a better position to handle higher interest rates when they come? It appears so. Some households will fare better than others, of course. The Canadian Association of Accredited Mortgage Professionals suggests 21% of current mortgage holders ó or 1.2 million mortgages ó may face financial difficulty. The Bank of Canada's analysis suggests normalized rate could affect 7.5% of households.