Canada’s economy is slowing down and unemployment is rising, but that isn’t slowing credit consumption. Statistics Canada (Stat Can) data shows household debt continued accelerating in October. A combination of lower rates and moral hazard has led to aggressive borrowing, with credit now rising at a faster pace than GDP. It’s a questionable setup when the economy’s fundamental indicators are eroding.
Canadians Owe More Than $3 Trillion In Debt, Growth Is Accelerating
Canadian borrowing is once again ramping up as costs fall. Outstanding household debt climbed 0.3% (+$10.3 billion) to $3.01 trillion in October. The balance is 3.7% (+$107.3 billion) higher than last year, printing the fastest annual growth rate since June 2023. Even after adjusting for inflation, household debt is rising faster than GDP.
Canadian Mortgage & Consumer Debt Are Accelerating
The annual growth for household mortgage and consumer credit growth.
Source: Stat Can.
Canadian Mortgage Borrowing Returns As Home Sales Recover
Most household debt is traditionally mortgage credit, which was behind the monthly move. Household mortgage debt rose 0.4% (+$8.2 billion) to $2.24 trillion in October, a slightly faster rate than total household debt. That pushed annual growth to 3.6% (+$78.2 billion), the highest rate since September 2023.
Bank of Canada rate cuts are behind the return of mortgage credit growth. They didn’t introduce stimulus via increased credit capacity since fixed-rate mortgages were much cheaper even after the rate cuts. However, the cuts improved sentiment by creating a little FOMO, helping to boost existing home sales.
Canadian Consumer Debt Continues To Grow Faster Than Mortgages
Consumer (non-mortgage) credit had been relatively slow before 2020 but has since picked up and continues to rise aggressively. The balance added 0.3% (+$2.0 billion) hitting $776 billion in October, pushing annual growth to 3.9% (+$29.2 billion), the fastest rate since February 2023.
Consumer credit acceleration is being attributed to less optimistic circumstances. Experts have previously attributed the segment’s recent rise to the cost of living. Households are increasingly turning to consumer credit to make ends meet. A rise in credit card delinquencies and insolvency filings demonstrate the less-than-favorable circumstances.
Mortgage borrowers are also showing some signs of stress but there’s been a greater effort to mitigate lender losses in this area. Mortgage delinquencies are rising, but not to the extent many had expected. This is largely due to the extreme measures that Canada has asked lenders to adopt to mitigate mortgage delinquencies. Good news for over leveraged borrowers, at the expense of adding moral hazard.
Rising household debt can be good or bad, depending on the context. Falling rates are a form of stimulus, allowing borrowers to use their future income to pull their future demand forward. When it occurs at the bottom of the cycle and motivates more consumption, that’s a sign that the economy has found a bottom.
In the current economy, rising credit demand is happening while GDP is slowing and unemployment is on the rise. Rising demand and higher prices aren’t typically observed during economic erosion, potentially a red flag of mismatched incentives.
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