In the midst of the Covid-19 crisis, Canadian households appear to be holding on to their financial positions, based on an economic analysis released on Friday by CIBC Economics.
For example, government support has offset lost income. Using StatsCan data, the CIBC Economics report found that total income assistance from the Canada Emergency Response Benefit (CERB) roughly matched total income lost for recipients — $43.5 billion.
“This means that since the beginning of the crisis, personal income in Canada has at least remained stable,” the report said.
Another positive for households’ financial positions is decreased credit use. Data from Equifax show that households recently reduced their use of credit across most major products.
Since mid-March, overall credit fell by almost 1%, the report said, and outstanding balances on credit cards fell by more than 10% since the crisis began.
With CERB offsetting income losses and debt outstanding falling, the debt-to-income ratio is likely to be stable or lower than it was before the crisis, the report said — “a totally different experience than was seen in the 2008 recession, when the debt-to-income ratio rose from 140% to 150%.” (A debt-to-income ratio of 150% means there was $1.50 in credit market debt for every dollar of household disposable income).
StatsCan’s latest data show that the ratio rose slightly in the first quarter to 176.9% from 175.6% in the fourth quarter of last year.
The CIBC report also considered the risk of mortgage holders being in arrears this fall, with just over 15% having deferred mortgage payments. Analyzing credit scores, it found that borrowers with the lowest scores accounted for less than 1% of mortgages.
Overall, CIBC expects that stable incomes, mortgage deferrals during the pandemic and lower interest rates will likely lead to a temporary decline in the debt service ratio (credit payments as a proportion of income).
“While such an improvement was seen in all other recessions, the current one will probably be more notable given the large scale of the income and debt payment assistance available to households,” the report said.
For the first quarter, the debt service ratio fell to 14.67% from 14.81%, StatsCan said.
In the medium term, will households continue to hold up?
CIBC said the trajectory of financial health will be “a function of how quickly and in what fashion the assistance programs are removed, and to what extent labour income can replace them.”
That’s where things get iffy. Much economic uncertainty lies ahead, and, for businesses and governments, debt levels are rising considerably.
For non-financial corporations, for example, the debt-to-equity ratio rose to 212.3% in the first quarter — the highest level since the first quarter of 2009, StatsCan said — from 188.6% in the fourth quarter.
Rising debt levels may not be concerning in the short term with low rates, but they do pose a risk in the medium to long term.
A Desjardins Economics Studies report released on Friday said higher debt could “weaken the Canadian economy’s situation should interest rates suddenly and unexpectedly increase.”
Impact of new CMHC mortgage rules
CIBC Economics said it doesn’t expect the latest tightening rules from the Canada Mortgage and Housing Corporation (CMHC) to have a significant impact on the mortgage market.
Last week, CMHC increased its lending standards, which included upping the required credit score to obtain an insured mortgage, and limiting the thresholds for the gross and total debt servicing ratios.
The new rules are aimed at restraining borrowers who may be accumulating too much debt, given low interest rates, the CIBC report said.
However, its analysis found that the impact of the new rules on homebuyers will be marginal.
For example, the raised credit score will affect only about 5% of CMHC’s mortgage originations. It also noted that CMHC accounts for only 15% of total originations, and private insurers aren’t implementing similar rules.
“The bottom line is that this is not a game changer for the market,” the report said.
Still, a segment of homebuyers will be affected — likely first-time buyers, considering that the rules apply to insured mortgages.
As such, the rules represent “another barrier to entering the housing market after years of unaffordability in some major cities,” the report said.