For the first time since 2002 consumer credit in Canada is rising more slowly than in the U.S.

TORONTO, May 9, 2012 /CNW/ - Canadians are putting the brakes on spending with outstanding consumer credit now rising at the slowest pace since the early 1990's, finds a new report from CIBC World Markets.

"Regardless of how you measure it, there is a clear slowing trend in the pace of growth in household credit," says Benjamin Tal, Deputy Chief Economist at CIBC and author of the report. "The pace of growth is no longer a reason for the Bank of Canada to move from the sidelines any time soon.

"Households should get credit not only for notably slowing the pace at which they accumulate debt in an environment of historically low interest rates, but also for managing their debt in the most optimal way on record."

The report notes that on a year-over-year basis, total household credit (consumer credit plus mortgage outstanding) is now rising by just over five per cent — the slowest pace since 2002. The key is the rapid softening in the pace of consumer credit. As of March 2012, overall consumer credit outstanding rose by only 2.3 per cent on a year-over-year basis — the slowest pace since the early 1990s. On a rolling month-over-month basis, consumer credit is now rising by only 0.1 per cent — the slowest pace since 1993.

"The slowing in consumer credit is largely due to the softening performance of the credit cards market," adds Mr. Tal. "Overall growth in card balances is now marginally in negative territory, with both classic and premier cards showing a similar performance.

"While the dramatic softening in activity during the recession was in part due to supply factors, today's slowing is driven more by demand considerations, as well as an active shifting of card balances to lines of credit. This trend is very visible in the most recent uptick in activity in the lines of credit portfolio, which we believe is mostly a transfer of balances from the credit card portfolio."

For the first time since 2002 consumer credit in Canada is rising more slowly than in the U.S. During the highly leveraged period between 2002 and 2008, consumer credit in Canada rose twice as fast as it did in the U.S. After the crisis, growth in U.S. consumer credit actually moved into negative territory, while consumer credit in Canada continued to expand and with U.S. consumer credit now expanding at its pre-recession rate of 4.3 per cent year-over-year.

In addition to a slowing in the growth of consumer debt, the mortgage market is also starting to show some early signs of moderating activity. As of March 2012, mortgage outstanding rose by 6.3 per cent on a year-over-year basis — a rate that is well below the 7.3 per cent average rate of growth seen in the past two years and well below the pace seen during most of the decade.

The softening trend is much more evident in a rolling month-over-month growth rate, which at 0.5 per cent is the slowest since late 2001. The recent modest softening in mortgage activity is coinciding with a reduction in the mortgage arrears rate, which as of January 2012, stood at under 0.4 per cent after reaching close to 0.5 per cent during the recession.

This rate is still double that seen before the recession but is significantly below rates seen in previous recessions. The arrears rate in Alberta is by far the highest in the nation. This reflects the fact that, on average, homeowners in Alberta are younger and less established. As well, the pre-recession period in Alberta had seen activity surging rapidly — leading to a higher percentage of consumers overextending themselves.

"There is no debate about the fact that the housing market is overshooting," says Mr. Tal. "The only question is what will be the nature of the adjustment. In the absence of a trigger for a violent correction, we do not see such an outcome in the near future. We continue to call for a gradual softening in the market, with prices potentially falling by around 10 per cent in the coming year or two.

"Other factors that will work to soften activity in the market are ongoing changes in the mortgage market with increased scrutiny from regulators regarding risk management practices, as well as the increased use of full-scale appraisals as part of the adjudication process. Accordingly we see mortgage market growth softening gradually to around five per cent year-over-year during the course of the year, down from the current 6.3 per cent rate."

Interest payments on debt accounted for 7.3 per cent of disposable income in the fourth quarter of 2011, roughly the same ratio seen in the previous two quarters. This relative stability, however, masks two diverging trends; interest payments on mortgage debt is falling, whereas interest payments on consumer credit is rising. Mortgage interest payments as a share of disposable income are at the lowest point since late-2004.

After rising rapidly during the recession, the debt-to-asset ratio has stabilized at 20 per cent in the past two years. With credit softening and asset value rising in the first quarter of the year, we expect to see this ratio improving — a fact that should see the ratio of net worth to disposable income rising in the first quarter. Note that an average household in Canada currently carries a debt load of $102,000 versus an asset position of over $350,000 (of which $250,000 is real estate).

"Looking ahead, it is difficult to get too excited about the consumer's near-term prospects," notes Mr. Tal. "With consumer credit growth slowing to a crawl, the housing market leveling off and potentially losing some ground, Canadian consumers will lose two of the main pillars of strength that made them the champion of the recent economic cycle. And while the volatility in the job market statistics will continue to confuse observers, the trend is clear: the pace of job creation in Canada is slowing from 22,000 jobs a month in 2011 to probably around 15,000 in 2012. And the changing composition of employment is likely to work to lower the quality of employment in the country along with the bargaining power of workers — limiting gains in labour income."

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/hca-120509.pdf

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