TransUnion maintains projections on debt growth & potential interest rate impact
Back in November, TransUnion projected a marginal increase of non-mortgage debt levels held by Canadians to $21,747 by the end of 2017.
And with an improved economic outlook, analysts predicted that reading — which includes vehicle installment contracts held by Canadian consumers — may reach $22,000 by the end of 2018.
Auto Remarketing Canada circled back with TransUnion again in January to see if the credit bureau modified its forecast. Turns out, analysts held their position on the issue.
“We are seeing positive dynamics in the current market from the consumer perspective with good employment picture in most of Canada, strong consumer demand for many forms of credit and well-managed, low delinquencies,” TransUnion analysts said via email.
“At the same time, there are some potential concerns that bear watching such as lingering energy slump impact on consumer loan demand and performance in specific regions and flat consumer confidence levels,” they continued.
In the auto finance market, TransUnion recapped that account volume produced a modest increase of 1.9 percent in the third quarter of 2016, while total outstanding balances registered an increase of 4.8 percent year-over-year.
Analysts indicated average balances of new contracts generated during the third quarter increased by 7.4 percent from a year earlier, but this change was not universal across the risk tiers. TransUnion noticed the average amount financed in the subprime space jumped by 10.7 percent — the highest of all risk tiers.
TransUnion added that near-prime saw a 9.6-percent increase in the average amount financed. In contrast, prime and better segments produced lower balance growth in new contracts. Analysts pinpointed the rises at 8.2 percent for prime, 5.7 percent for prime plus and 4.5 percent for super prime.
“Lenders would benefit from continuing to monitor this shift in risk mix and higher balances among non-prime borrowers,” TransUnion said.
“Auto delinquencies — calculated on the national level — were largely stable with a 5-basis-point improvement in the 60-day delinquency balance rate,” the bureau continued. “However, there is a significant regional difference between the oil patch and the rest of the country.”
Analysts pointed out that Alberta’s 60-day delinquency balance rate increased from 0.91 percent to 0.96 percent in the third quarter, while Ontario and British Columbia both experienced improvements and their 60-day delinquency balance rate stood at 0.49 percent and 0.44 percent, respectively.
Handling an interest rate rise
Auto Remarketing Canada revisited another important assertion TransUnion made last year.
A TransUnion study indicated that the large majority of Canadians would not be materially impacted in the near term by an interest rate increase. However, more than 700,000 consumers could struggle with their finances — which might include staying current on their vehicle installment contract — even with a quarter-point hike, and up to 1 million borrowers may not be able to absorb the increase in their monthly payments if interest rates rise by 1 percent.
Interest rates in Canada have remained low for several years, and the Bank of Canada Target Overnight Interest Rate currently stands at 0.5 percent. This is the benchmark interest rate set by the Bank of Canada at which major financial institutions lend overnight funds among themselves; changes in this target rate influence other interest rates, including the Prime business rate, currently standing at 2.7 percent.
Most finance companies price loans based on the Prime rate plus some margin.
TransUnion recounted that the Target Overnight Interest Rate peaked near the end of 2007 at 4.5 percent. Since then, it declined to a low of 0.25 percent (where it remained for much of 2009) and now stands just above that level at 0.5 percent. It is expected that this and other interest rates will rise in the future, though the timing and magnitude of any rate increases remain uncertain.
TransUnion’s study determined that there are more than 26 million credit-active Canadian consumers, and on average, they carry 3.7 credit products each. The study focused on two major types of debt that carry variable interest rates that typically adjust when benchmark interest rates change: lines of credit and variable-rate mortgages.
Approximately 7 million Canadian consumers carry at least one of these two variable interest rate debt types. These loan types are most impacted by interest rate changes and can create a payment shock —the increase in borrowers’ monthly payment obligations that they cannot control.
When asked for an update about this topic in January, TransUnion analysts replied, “In general, we have not seen any material changes in the economy or consumer credit markets that would lead us to expect significant changes to our prior conclusions.”
What to watch in 2017
Auto Remarketing Canada closed its discussion with TransUnion by asking about what trends or possibilities are on analysts’ radar to watch closely this year.
Analysts said global energy prices and Canadian real estate values would be the two “significant, connected” variables to observe.
“As ever, any significant further recovery in the oil price will help Alberta and may stimulate increased investment in the oil patch,” TransUnion said. “What may be a good situation for Alberta and the large energy sector there is not so positive for other regions as higher energy costs may further squeeze consumers who are already heavily indebted and at the same time drive inflation.
“The inflationary pressures may push the Bank of Canada to raise interest rates,” the credit bureau continued. “This may be a big worry to the federal government as due to concerns about the overheated real estate market which continues to see significant sales price growth will obviously be affected by rising base rates.
“Recent legislation changes are designed to try to gently take the steam out of this market and avoid a large and damaging rapid collapse as was seen in the U.S. in the last recession,” TransUnion added. “However, it remains to be seen whether these efforts will slow/stop real estate price growth.”
And speaking of the United States, analysts also considered how much — if at all — President Donald Trump coming into office might impact Canadians.
“TransUnion cannot predict how the Trump presidency may impact Canadians overall. If President Trump implements pro-economic growth policies that are successful in stimulating U.S. economic expansion and job creation, there is certainly the possibility that this could positively impact the Canadian economy as well,” TransUnion said.