Insolvencies are Increasing.
After a three year drunken sailor lending spree by the banks, fuelled by the government, insolvencies are increasing. Insolvency filings dropped off dramatically during government imposed lockdowns, the government was tossing money around through CERB and CEBA and encouraging banks to qualify consumers for idiotic levels of debt.
It was this lending spree that reduced insolvency filing levels from 137,178 in 2019 to a low of 90,092 in 2021. While avoiding filing either a proposal or a bankruptcy might at first blush appear to be a good thing, in the background consumer debt has doubled and inflation has reached astronomic heights.
Since records have been kept, the use of credit cards has exploded to epic levels, with very few users being able to afford to pay their credit cards off. The official narrative tells us that up to 70% of consumers pay their full balances each month, but that is quite simply a lie predicated on a misinterpretation of data.
Credit card statements are issued on the 14th day of the month, and if set up to be automatically paid in full on the due date (the 28th of the month) the customer has half a month of charges on the card at the time the payment is taken. Few Canadians can make it from paycheque to paycheque without relying on bank issued credit cards.
The past three years has been economically engineered (deliberately or otherwise) to force consumers into debt and to self liquidate. A person with an income of $45,000 per year would have had trouble negotiating a mortgage for a $300,000 house in 2019 but by some miracle in 2021 they had no issue getting a mortgage for a $600,000 home.
The government has been actively encouraging first time home buyers not only to liquidate more RSP savings to create debt, but also to borrow money to put into RSPs to acquire debt. The average price of housing (in the London area) dropped from a high of $832,000 in 2022 to a current level of $674,000 a drop of almost 20%. Meanwhile rental costs have exploded in the face of high demand to an average of $2,400 per month for a two bedroom apartment unit.
The Role of CMHC:
CMHC, whose mandate was to provide affordable housing for Canadians, has been a major contributor to the demise of the Canadian economy and have helped fuel the overpriced housing crisis. CMHC insurance does nothing for consumers except to compound a debt trap.
When coerced to purchase CMHC insurance you are insuring the lender, you do not have any insurance protection at all. And the premiums are ridiculous – while, as a first time homebuyer, you must provide a minimum downpayment of 5% it shakes out that 4% of that goes to CMHC and the remaining 1% is eaten up on land transfer taxes and legal fees leaving you with a 100% mortgage.
Some folks have purchased CMHC insurance to obtain a preferred interest rate on a renegotiated mortgage, not realizing that they have no insurance and that the premiums are more costly than the rate savings. So much for the “affordable housing mandate”.
Over the years proposals have become the average consumer’s choice for debt resolution. There are a number of reasons for this including the burden of paying formula driven “surplus income”, the requirement to settle for any increased value of real property, and the stigma of having a bankruptcy on a credit report, as well as the assurance of a set monthly payment under a proposal.
In 2019 of all the 137,178 consumer insolvencies filed 39% were bankruptcies, the rest were proposals. By 2022 insolvency filings were starting to rebound and had reached 100,184 (73% of the 2019 pre-lockdown levels) with 24% being bankruptcies. This data is in stark contrast to a decade earlier when in 2012 a total of 118,398 filings were made with 60% being bankruptcies.
Insolvencies are Increasing:
We anticipate that insolvencies will continue to increase, most likely in the form of proposals to creditors – repaying an average of 15% – 25% on the dollar of debt values. Lenders have become quick to exploit the financially vulnerable, including new immigrants often with little or no experience with consumer debt. “Newcomers’ programmes” are available at every major bank, where free banking, a $5,000 limit credit card and other credit facilities are readily available.
Desperate banks make credit cards available to people who are currently under bankruptcy or proposal administration. They are desperately trying to mitigate their losses from the insolvency proceeding by gambling that the new debt will be around for a few years before the consumer seeks another form of relief.
We anticipate that insolvency filing levels will return to pre-lockdown levels and possible continue up slightly for the next 2-3 years. Hopefully this trend will ease as the economy improves and the government throttles back on taxes and enhances regulations for the banking/lending industry and forces the CMHC to return to its original mandate.