519-646-2222Insolvency Rates Rebound
We are seeing insolvency rates rebound as interest rates are approaching historically normal levels. A whole generation of homebuyers have never seen interest rates reach more than about 3-4%. Canadian banks collapsed in 2007/8 and were bailed out by taxpayers to the tune of several hundred billion dollars.
The result was insufficient to restore the banks to profitability, so the Central Bank (Bank of Canada) entered into a protracted and probably misguided period of quantitative easing, lowering the rates at which banks could borrow money. Chartered banks responded by lowering their rates to entice people to take on more debt, the strategy worked.
Canadians, already saturated in debt, expanded their use of credit cards and lines of credit as banks lowered minimum monthly payment requirements and increase credit limits. The government encouraged consumers to collapse savings, in order to fuel the banks further by using up to $35,000 of RSP savings for Homebuyers Plans (“HBP”s).
Banks targeted “newcomers” (immigrant populations) with reckless lending policies, including giving away credit cards with a $5,000 limit, free banking, and easier access to other debt products to people who have been resident in Canada for less than five years. As the government eased restrictions on immigration and non-permanent residents the numbers of newcomers surged.
By 2023 the number of newcomers had exploded to 1,166,518 from some 298,678 in 2008. To bankers that meant 867,840 more potential borrowers than fifteen years earlier. In terms of credit card lending alone that would represent $5,832,590,000 worth of debt that the banks could charge 8,400% more, per annum, than they paid to borrow the money from the BoC.
Miraculously, during the past four years, banks qualified consumers for ridiculously high mortgages on speculative house prices that were over valued by the IMF by 60% in 2013. How on earth did a couple with a household income of $80,000 qualify for $600,000 worth of mortgaging on overpriced housing in 2021 when they would not have qualified for $200,000 two years earlier:
As a result of easy access to massive levels of debt, consumers, eager to take advantage of the opportunity to improve their lifestyles, went on an unfettered spending spree. Unsecured debt, car and furniture loans were wrapped up into mortgages and insolvency filing rates plummeted.
Since mortgage rates started rebounding and house prices began their correction, consumers have been exposed to record debt levels that are far beyond their means to reconcile and have once again started to avail themselves of the benefits of Canada’s insolvency laws. At the end please be mindful that insolvency filing rates have not reached pre-lockdown levels yet and mortgage rates continue to be lower than historical averages – it isn’t over yet.