Here is some cautiously optimistic projections dealerships and finance companies can take into the new year as Canadian consumers continue to prioritize their auto-loan commitments.
Despite a potential slowdown in the Canadian economy over the next year, TransUnion Canada said the Canadian consumer credit market is expected to see continued growth in consumer-level debt and no significant increases in delinquency rates.
According to the its Industry Insights Report released on Thursday, TransUnion Canada projected that average consumer debt balances will continue to increase for Canadians across mortgage, credit card and other non-mortgage related debt including auto financing through 2019 and that serious delinquency rates will either decline or remain steady over the next year.
Analysts explained the continued low delinquency environment portends a healthy consumer credit market within the current economic climate. However, TransUnion Canada acknowledged a potential slowdown in the Canadian economy in 2019, combined with soft wage growth, heightened uncertainty beyond Canadian borders and continued interest rate increases may cause some challenges.
The credit bureau cited information from Oxford Economics that Canada’s GDP growth is widely expected to slow from an expected rate of 2.2 percent in 2018 to 1.9 percent in 2019. TransUnion Canada noted this slowdown in economic activity may impact consumer spending and employment levels, which could put stress on consumers’ capacity to service debt.
At this time, none of these factors are significant enough to negatively impact the outlook for the consumer credit market in 2019, according to Matt Fabian, director of financial services research and consulting for TransUnion Canada.
“The Canadian consumer credit market has performed extremely well over the past several years, with solid growth supported by strong economic fundamentals,” Fabian said.
“Looking into 2019, we anticipate a continuation of these positive trends, which is good news for Canadian credit consumers,” he continued. “However, there are signals of a mild economic slowdown emerging, which presents an opportunity for Canadian consumers and businesses to plan and evaluate different potential scenarios that could impact their ability to continue to responsibly manage their debt.”
The year ahead: 2019 forecast
TransUnion Canada’s forecasting models provide forward-looking insights for consumer credit balances and delinquency rates, and incorporate dozens of credit, behavioral and macroeconomic variables.
The 2019 forecast indicated that the outlook remains positive for the Canadian credit market, with continued opportunities for growth and balanced risk despite some potential economic challenges.
At the conclusion of 2019, TransUnion is forecasting that the average mortgage balance will increase by 3.4 percent over the forecasted year-end 2018 level to $274,533, and average non-mortgage debt balances will reach $30,687, a 2.8 percent annual increase.
Serious delinquency rates are forecasted to decline or remain steady for most credit products, according to the report.
Credit card delinquency rates at higher risk of an increase
TransUnion Canada predicted credit cards are the one major credit product that is forecast to have a slight increase in delinquency rates in 2019, with other products expected to have lower delinquency rates.
TransUnion Canada research studies have shown that, when faced with economic pressure, consumers often have a hierarchy around which debt payments they continue to stay current on and which they allow to go delinquent. The analysis showed that, for consumers with credit cards, auto loans and mortgages all in their wallets, credit card payments are generally the first product type that consumers will go delinquent on, preferring to keep payments like auto loans and mortgages in good standing if they are forced to choose.
While Canada is not expected to slip into a recession in 2019, Fabian explained any significant economic headwinds would likely put credit cards at a higher risk for increased delinquency rates relative to other major credit products.
“Consumers’ ability to manage their debt is directly impacted by their disposable income,” Fabian said. “If we were to see an economic downturn and pressures on consumer income, we would anticipate credit cards to be the product that would be impacted first in terms of higher delinquencies.
“At the same time, we would expect balances to rise as consumers look to cards to help make ends meet,” he continued. “While current expectations are for continued positive economic growth in 2019, lenders are likely to monitor their portfolios closely in the event of any negative news."
Potential for regional shocks across Canada
TransUnion Canada sees the possibility for regional economic shocks across Canada contributing to a slight rise in overall delinquency. These potential challenges include the impact of steel and aluminum tariffs on manufacturing, continued decline in oil prices and overall industry disruption such as the recent news of the General Motors plant closure in Oshawa.
“While we see the impact of tariffs and localized shocks as having very little impact on overall delinquency across Canada, it would certainly be felt by consumers in those regions and some consumer credit portfolios may be regionally impacted,” Fabian said.
“Depending on the severity and length of the oil price decline, some regions could experience delinquency rate increases of up to 50 basis points, similar to what occurred in Alberta and Saskatchewan following the last oil price drop,” he continued.
“Typically, as these economic shock events occur, we tend to see some unemployment increases lagged by a rise in delinquency as incomes and capacity to service debt are constrained,” Fabian went on to say.
Mortgage balances to slightly increase
TransUnion Canada pointed out stricter mortgage qualifying rules and stress tests have been successful in tightening entry into the mortgage market for many consumers during the past 12 months.
As both consumers and lenders continue to navigate the new environment, TransUnion Canada expects a slight increase in average mortgage balance per consumer, with new mortgage origination amounts reflecting the still-elevated home prices in many major metropolitan areas.
“The tighter mortgage rules will likely have some positive impact on rising delinquency rates when Canada faces the next economic downturn. Given that the Canadian market already enjoys very low delinquency in the mortgage space, the stress testing rules should help bolster this and reduce the impact of any shock,” Fabian said.
Non-mortgage delinquency will continue to drop
Touching on the space that includes auto financing, the report highlighted a decrease in overall consumer non-mortgage delinquency is expected to persist through 2019 as consumers continue to do a good job of managing their credit obligations.
But analysts emphasized delinquency rates are sensitive to economic events including, but not limited to, interest rates, unemployment, inflation and wage growth.
“Core economic fundamentals are likely to remain relatively stable through the coming year, and we predict this will have a correspondingly positive impact on delinquency levels,” Fabian said.
“Additionally, when we look at consumer payment patterns — particularly the ratio of how much consumers with a credit card balance are paying off in addition to their minimum required payments — we continue to see a healthy positive spread, which indicates that most Canadian consumers have some excess capacity to absorb shock,” he went on to say.
More information about the 2019 consumer credit forecast and details about the latest 2018 TransUnion Canada Industry Insights Report, including details about a variety of credit products, can be found here.