Canadian non-mortgage related debt increased 4.6% in the fourth quarter over the same period last year bringing the average to $26,768, its highest point in 2 years. This increase has many pundits scratching their heads trying to understand why Canadians aren’t getting the message. Both the Bank of Canada and the Department of Finance have been so concerned about the amount of overall consumer debt that have been working to reduce it through significant policy tactics and cautionary press releases.
The most aggressive of these tactics has been mortgage rule changes. A couple of years ago you could refinance your home to 95% of its value to consolidate your debts or to make a major expenditure. Today that amount is capped at 80%. For a $400,000 home that equates to $60,000 less equity you can access unless you sell your home.
As these new rules sink in you can expect to see mortgage debt decrease and non-mortgage debt increase. Consumers aren’t going to change their spending patterns overnight. Many Canadians will continue to extend their credit until they hit their limits. With refinancing options limited they’ll be forced to stop their spending with large balances left on high interest debt. You can expect to see non-mortgage debt continue to rise over the next year.
If the housing market maintains its value and if Canadian job numbers remain steady then this will play out as the government anticipates. Spending patterns will be forced to adjust to the new paradigm and consumer debt will come down.
On the other hand, if we experience a housing downturn or increases in the unemployment numbers then more frugal spending patterns won’t bail out Canadians in over their head. In this scenario we’ll see Canadians dumping their homes at decreasing prices to pay-off unsecured debt. Reduced home values with high debt loads will mean a surge in bankruptcies.
By focusing on the mortgage rules, the government is essentially letting us rack-up our non-mortgage related debt, without giving us the ability refinance it away. You can expect to see this debt number to continue rising until we hit the proverbial wall. That’s when it will get interesting.