Canada’s highly indebted households are starting to show serious signs of debt overload. Equifax data shows the rate of auto loan delinquencies hit a rarely seen level in Q3 2022. Consumer credit in general has seen rates begin to climb as interest rates rise. Housing remains the one exception, though that’s likely to change as the market adjusts to higher rates.
Canadian Auto Loan Delinquencies Climbed Aggressively
Canadian auto loan delinquencies are climbing aggressively, hitting rarely seen levels. In Q3 2022, about 1.97% of auto loans had become delinquent. It was a big climb of 0.31 basis points (bps) from last year, an exceptionally high rate of delinquencies. Other than three quarters (Q4 2019 to Q2 2020), the rate hasn’t been this high in at least a decade.
Canadian Auto Loan Delinquency Rate
The share of auto loan accounts that are at least 90 days past due.
Source: Equifax; CMHC; Better Dwelling.
Delinquency Rate Is Climbing For All Consumer Credit Products
The end of the cheap money era has led to climbing delinquency rates for all consumer debt. Credit card delinquencies climbed to a rate of 1.29% in Q3, up 30 bps in just one year. Despite hitting the highest level since 2020, it remains at historically low levels. At this point, it should be seen as healthy risk normalization.
Canadian Consumer and Mortgage Loan Delinquency Rate
The share of consumer loan and real estate-secured accounts at least 90 days past due.
Source: Equifax; CMHC; Better Dwelling.
Delinquencies for line of credit (LOC) debt has also seen a small pop from historic lows. The rate climbed to 0.43% in Q3, up from the record low of 0.41% in the previous quarter. Still very low, and one increase might not make a trend. However, it was the first increase since 2020, and the largest in a decade. Look at us, discovering new memories together.
Real Estate Debt Bucks The Trend… For Now
One segment bucking the trend (for now) is real estate secured lending. Mortgage delinquencies fell to 0.14% in Q3 2022, a new record low. Back in 2019, the rate was more than double this level, so this isn’t a normal amount of liquidity. It’s an unusually tight market where people just don’t default, which doesn’t mean what you think it does. But let’s come back to that.
The delinquency rate for home equity lines of credit (HELOC) also fell. Just 0.1% of accounts were delinquent in Q3, a new record low for the segment. This segment travels closely with mortgages, since they’re unique types of secured debt.
Unlike most types of loans, real estate delinquencies aren’t indicative of borrower health. If a market is booming, prices are rising and buyers will scoop the property within days. That means there’s little reason for a mortgage to become delinquent. A borrower in tough circumstances would liquidate before the 90 day mark. That’s why bubbles typically have low default rates.
That’s expected to change in the coming months, as the market changes. Home prices are now showing negative growth, and high rates have shrunk mortgages. As higher rates persist, a normalization of real estate delinquencies is likely. Just don’t expect a US-in-2008-style bloodbath—credit liquidity isn’t that tight.
