TransUnion put out its Q2 Financial Service Canada Industry Insights Report. The report focuses mostly on the COVID-19 pandemic and how it affected the economy. The report had a number of interesting findings. As such, we thought we’d highlight some of them in an article.
Some of the interesting points in the TransUnion report note that the economy has rebounded more rapidly than expected, how consumers and lenders have fared during COVID-19, the resiliency of consumers and interesting stats on credit cards and mortgages. Let’s look at all of these in depth now.
The Economy has Rebounded More Rapidly than Expected
There’s no arguing that the Canadian economy has been hard hit by COVID-19 like other national economies have been around the world. However, the good news is that the Canadian economy has fared far better than other nations. Although we may not be seeing a V-shaped recovery as some had predicted, the Canadian economy has rebounded more rapidly than expected.
When we look at the Canada’s handling of COVID-19 against other G7 countries, it’s doing quite well. Although Canada has been criticized for acting too late similar to the U.S., it’s doing a lot better than the U.S. and countries in Europe that acted a lot sooner.
On a per capita basis, Canada has fewer COVID-19 cases compared to all the other G7 countries except Australia. Not surprisingly, the U.S. is the worst when it comes to COVID-19 cases on per capita basis. Meanwhile, European counties like Germany, Italy and Spain fall somewhere in the middle.
A good measurement of how a country’s economy is performing is its unemployment rate. A country’s unemployment rate is for anyone who’s currently unemployed who wants to be working and is looking for work. According to TransUnion, Canada’s national unemployment rate reached above 12 percent in the second quarter of 2020. This is a far cry from other G7 countries.
Although the recovery isn’t going to happen overnight, TransUnion is forecasting for employment to gradually return to pre-COVID-19 levels by 2024. The economic recovery will happen as quickly as the economy reopens. If Canada sees the feared second wave and the economy is forced to shut down again, it could change this forecast, but so far things are looking promising.
Gross Domestic Product
Another good measure of how a country is performing is its Gross Domestic Product (GDP). GDP is the market value of all the final goods and services produced in a specific period of time. Canada’s GDP took a big hit when the economy was forced to shut down in the second quarter of 2020. GDP fell by almost 15 percent in the second quarter of 2020. This is a huge hit. To put this into perspective, GDP only feel by less than five percent during the great recession in 2009.
As mentioned, the recovery won’t happen overnight. It will likely take a long time. That being said, barring any more lockdowns, TransUnion is forecasting Canada’s GDP to grown by 15 percent in the second quarter of 2021. It expects GDP to grow at an above average rate on the road to recovery, until reaching more normal levels in 2023.
How Consumers and Lenders Have Fared
To say that COVID-19 is an unprecedented time would be a huge understatement. Nobody expected 2020 to be like this. Most consumers and lenders expected COVID-19 to play out similarly to SARS. Nobody in their wildest dreams though it would lead to countries closing their borders and a shutdown of the global economy, but here we are.
In recognition of the difficult time that it’s been, consumers and lenders have been working together to manage the ongoing pandemic. To avoid a record level of defaults, the government and lenders came up with a solution to help get Canadian households through this rocky time.
To that extent, lenders announced one-time payment deferrals for consumers for up to six months. Leading the way in accounts deferred was bank cards at 32 percent, followed by mortgages at 27 percent, open credit account at 13 percent, installments at 12 percent, auto loans at 10 percent and lines of credit at five percent.
In terms of the actual balances being deferred, it was a slightly different story. Mortgages accounted for the lion’s share, 88 percent of balances deferred. Meanwhile, auto loans accounted for four percent, lines of credit accounted for three percent, installments also accounted for three percent, bank cards accounted for two percent and open accounts only accounted for 0.1 percent.
Avoiding Payment Deferrals
To afford these payment deferrals, the federal government has put aside $87 billion in loans and other credit measures. This is more than the federal government has spent on tax deferrals ($85 billion), CERB ($60 billion) and CEWS ($45 billion).
But it hasn’t all been sunshine and rainbows. Canadian consumers worry about how they’ll adapt to an unprecedented consumer lending environment.
When asked by TransUnion what bills and loans Canadians are most concerned about being able to pay, credit cards came in first at 45 percent. Other bills Canadians are concerned about paying include utilities (31 percent), rent payments (29 percent), mobile phone bills (28 percent), mortgage payments (26 percent), Internet (25 percent), insurance (22 percent) and car payments (21 percent).
Who is hurting most?
According to TransUnion report, those hit the hardest economically from the pandemic are younger folks. Overall, 53 percent of Canadians indicated that their household income has been impacted by COVID-19. However, when we break that down based on generations, 60 percent of Gen Z said that they had been impacted. 60 percent of millennials and 58 percent of Gen X said that they had also been impacted, compared to only 42 percent of baby boomers.
Of those whose income has been impacted by COVID-19, the average budget shortfall is $877.20. That’s not a small sum of money. Luckily there are government benefits like the CERB to help get you by these difficult times. This has led to consumer confidence starting to trend upward in recent months.
Consumers Stay Resilient During COVID-19
During a major economic downturn you’d expect credit account balances and delinquencies to spike, but that hasn’t been the case with COVID-19. Average non-mortgage consumer debt and delinquencies actually declined during the crisis.
Delinquencies were down 4.2 percent in the second quarter from the previous quarter. Meanwhile, bank card balances were down by an average of 12.3 percent, auto loans by 3.3 percent and lines of credit by 3.2 percent.
That begs the question: were Canadians just well-prepared with sizable emergency savings or is something else behind the better than expected numbers?
Experts believe that a couple things happened. It wasn’t because Canadians have sizable emergency savings because that simply isn’t the case. Statistics have consistently shown that about 50 percent of Canadians live paycheque to paycheque. Without a single paycheque those Canadians would have difficultcy paying their bills. So, if it wasn’t emergency savings, what was it?
The main two factors that helped avoid a huge number of consumer defaults all at once were the government benefits like the CERB and payment deferrals. Both played an important role, but it was the government benefits that helped by far the most.
According to TransUnion, only 9.2 percent of Canadians have a payment deferral on file and the vast majority are only deferring one account. For those with two or more deferrals, 67 percent have their mortgage deferred, 48 percent have installment or auto loan payments in deferral and 41 percent have bank cards in deferral.
Interestingly enough, it’s the consumers with the best credit, the super prime consumers, who are taking advantage of payment deferrals the most, although they have the lowest proportion deferred. Super prime only have an eight percent of their proportion of debt balances deferred. Meanwhile, subprime have 25 percent deferred on average.
Interesting Stats on Credit Cards and Mortgages
It shouldn’t be as a surprise, but Canadians spent less than usual during COVID-19. When the economy shut down in mid-March, it was hard to spend your money. Besides ordering takeout on your phone, all the usual places we go to for entertainment like movie theaters and sporting events were shutdown.
As a result, outstanding balances on credit cards decreased as spending went down. This led to a shift with consumers. Instead of spending, consumer shifted their focus to saving money and paying down bank card debt.
The total number of cardholders sat at 25.4 million in the second quarter, although consumers spent less on these cards. The outstanding balance for all cardholders was $85 billion in the second quarter of 2020. That’s down from $96 billion a year ago in the second quarter of 2019.
A decline in Credit Usage
With fewer things to spend their money on, Canadians are signing up for fewer credit cards. Canadians signed up for 15 percent fewer bank cards in the second quarter of 2020. Bank card originations declined across the board from super prime borrowers to subprime borrowers.
Those who saw the biggest decline in bank card balances were the consumers with the best credit. Average bank card balances declined by 16.2 percent for super prime borrowers and 9.5 percent for prime plus borrowers. Meanwhile, balances only dropped by 0.5 percent and 0.1 percent for near prime and subprime borrowers respectively.
Mortgages saw a decline in mid-March, but things have quickly bounced back.
The Coronavirus Impact
COVID-19 hasn’t been a good situation by any means. I think almost all Canadian wished that the pandemic never happened. That being said, if there’s a silver lining to it (if you can call it that), it’s that money is super cheap to borrow. Mortgages are no exception. You can get mortgages for record level rates right now. That has a lot of Canadians signing up for mortgages. Mortgage originations were up by 29 percent in the second quarter of 2020.
Canadians overall are a risk adverse bunch. When it comes to mortgages, the vast majority of us prefer fixed rate mortgages. Then it shouldn’t come as a surprise that as fixed mortgage rates dipped to below two percent, the interest of Canadians increased in borrowing mortgage money.
Mortgage origination increased across the board in all credit profiles. Mortgage loans were up by a whopping 20.9 percent in the second quarter of 2020 when comparing super prime borrowers a year ago. Meanwhile, mortgage originations were up 17.3 percent for prime plus. Even those Canadians on the shakiest financial grounds saw mortgage growth. Mortgage originations were up by 14.3 percent for near prime and 14.8 percent for subprime borrowers, respectively.
Should you consider purchasing a home now?
Low mortgage rates certainly have something to do it with, but something else at play is COVID-19. With most Canadians working from home, we are rethinking our living situation.
Our homes have become so much more than just a place to live. Our homes have also become our place of entertainment, our gyms, child care and of course our workplaces. If you’re currently renting or living in a 500 square foot condo, it can be tough to make this work. Not to mention that it’s not so easy to physically distance yourself when you’re living in the dense city.
This has encouraged many Canadians to push up their decision to buy homes. The vast majority of Canadians can’t afford to buy homes in cash. Therefore, it’s led to the sharp increase in mortgage originations.
Although there are strong indications that an economic recovery is happening, we’re far from being out of the woods yet. Government benefits like the CERB won’t be around forever. If you’ve so far been able to keep up with your payments due to the CERB, but you lack a recovery plan once it ends, you could be heading for trouble.
If the TransUnion report is causing concerns about how you’re going to keep up with your debt payments once the CERB ends, call our offices today. We can help you come up with a plan to get your debts under control over the coming months and avoid financial stress.
Related to: TransUnion Q2 Financial Service Canada Industry Insights Report