Unprecedented household debt levels will give Canadians a rude awakening on their unpaid credit card bills if another economic downturn materializes in the coming years, according to a new report issued Wednesday.
The Moody’s rating agency warns that it will closely monitor Alberta and Saskatchewan with respect to consumer failures.
In the second half of 2006, the number of EI claims doubled in these two provinces, hit hard by the reduced crude prices that began in late 2014.
Moody’s says that the ability to pay household debt in Alberta and Saskatchewan will be an important test for the lending portfolios of major Canadian banks.
“We’re all a bit vulnerable now in Canada,” said Moody’s Assistant Vice President Jason Mercer. If the labor market were to be shaken, it could change the way consumers spend. ”
The level of indebtedness of Canadian households has almost doubled over the past 30 years, as low interest rates and economic stability have prompted consumers to take on more debt, including buying a home.
According to Moody’s, as of March 31, households incurred $ 1.67 in credit market debt for each dollar of adjusted disposable income.
In addition to low interest rates, the Canadian economic recovery since the last recession, which has been faster than in the United States and Europe, has also contributed to the explosive rise in debt levels.
Some analysts are concerned that an entire generation did not seem concerned about this unsustainable debt swell.
The rating firm says it is the increase in mortgage debt, rather than consumer loans, that drives up household debt.
Generally, consumers are more concerned about making their mortgage payments rather than paying their credit card balances, according to Moody’s. Credit cards offer more flexible payment solutions that do not result in a seizure of goods such as an automobile.
However, the interest rates charged by credit card companies are higher than those associated with mortgages.