Credit Demand Rebounds as Canada Reopens
Overall credit market health improved as economic and credit recovery strengthens. Demand for new credit rose as pandemic-related restrictions relaxed and the Canadian economy reopened. Mortgage originations led the rebound, driven by a strong housing market and low interest rates.
Today, TransUnion released the findings of its Q2 2021 TransUnion Canada Credit Industry Insights Report, which showed that the credit market has begun to recover as the economy reopens. Positive momentum around key consumer credit trends and performance contributed to TransUnion Canada’s Credit Industry Indicator (CII) rising to 93.5 points, up nine points from the previous quarter and up 29 points from the lowest point in the pandemic (August 2020 at 63.6). The CII, which TransUnion launched in July 2021, is a country-specific measure of consumer credit health trends in four categories: demand, supply, consumer behaviour and performance.
Source: TransUnion Canada consumer credit database.
(i) A lower CII number compared to the prior period represents a decline in credit health, while a higher number reflects an improvement. The CII number needs to be looked at in relation to the previous period(s) and not in isolation. In June 2021, the CII of 93.5 represented an improvement in credit health compared to same month prior year (June 2020) and compared to prior month (May 2021).
“With the economy reopening and many Canadians returning to some normalcy, we expect to see overall consumption and demand ramp up,” said Matt Fabian, director of financial services research and consulting at TransUnion. “As consumer confidence soars and the pandemic recovery continues, lenders need to be prepared to meet the increase in credit demand.”
Consumers are re-engaging and driving demand for new credit
TransUnion’s Industry Insights Report shows that consumers’ demand for credit began to increase in Q2 2021, with applications for credit (i.e., inquiries) returning to pre-pandemic levels. Inquiries rose 5% from June 2020 to June 2021, with the growth led predominantly by low-risk consumers, as inquiries from super prime2 consumers were up 29% YoY.
YoY change in inquiry volume by risk level (Q2 2021)
While origination volumes have not yet returned to pre-pandemic levels, they have begun to increase as the economy reopens. Originations in Q1 2021 were up 34% over their level at the lowest point of the pandemic in Q2 2020.
Growth in new credit continues to be fueled by the mortgage market as the pandemic drove a housing market boom. With low interest rates, and consumers looking for larger or unshared living spaces, home sales increased in volume and average sale prices increased 38% YoY. Mortgage originations increased 37.5% YoY in Q1 2021, and new mortgage originations accounted for $96B of new mortgage debt in the quarter, up 59.5% from Q1 2020.
However, the growth in the mortgage market was not evenly distributed across risk tiers. The Office of the Superintendent of Financial Institutions (OSFI) issued tighter rules for mortgage qualifying rates that went into effect in June 2018. The higher bar has led to a shift in the risk distribution of new mortgages, with the majority of new mortgages being issued to consumers in above-prime risk tiers (CreditVision® scores 760 or higher). Above-prime mortgage growth rose 53% YoY, while subprime mortgage originations declined 31% YoY, largely due to the implementation of the new rules.
In TransUnion’s recent Consumer Pulse survey, almost 70% of respondents indicated positive feelings about their financial outlook, reflecting growing confidence that is likely contributing to the increasing demand for credit.
Consumers are leveraging non-revolving credit
While demand for new credit is showing positive signs, Canadian consumers are somewhat cautious about adding to their debt levels. Only 21% of Consumer Pulse survey respondents in Q2 2021 said they planned to apply for new credit or refinance existing credit for the rest of 2021, down from 26% in the prior quarter. The total amount of revolving balances declined by 2.6% YoY in Q2 2021. Total credit card balances, which account for over three-quarters of all revolving balances, decreased by 3.9% YoY and line of credit balances decreased by 2.2%. “We are seeing consumers taking advantage of their higher liquidity to pay down debt,” said Fabian. “According to TransUnion’s recent Consumer Pulse survey, 46% have reduced their discretionary spending and 20% said they paid down debt faster.”
In contrast, non-revolving credit balances increased since Q2 2020, primarily driven by prime and above risk tiers. Unsecured loans saw the greatest increase, with a 17% rise YoY. In line with the housing boom, higher real estate prices drove an 8% increase in mortgage balances YoY. Similarly, strong demand and a shift in consumer preference toward pick-up trucks, SUV and luxury brands have contributed to a 3.3% rise in auto loan balances.
Average balance per consumer
YoY % change
Lines of Credit
Consistent with consumers paying down debt, delinquencies fell across all credit products throughout the pandemic. Overall consumer delinquency (90 or more days past due for credit cards; 60+ days past due for all other products) was down by 0.63% YoY to 1.96% as of Q2 2021. As the pandemic unfolded through 2020 and unemployment rates increased significantly (14% last May and improving to 7.8% by end of Q2 2021), declines in delinquency seemed unlikely, but consumers have benefited from higher levels of liquidity due to record savings, government subsidies, and lender deferrals. Canadian households accumulated $184 billion in gross savings between Q1 2020 and Q1 2021 and are estimated to have used $22 billion to pay down debt during the pandemic.3
Future recovery likely, but dependent on COVID-19 factors
Over the next 12 months, Canada appears set to experience a vigorous economic rebound, supported by a steadily growing economy, rise in employment rates and ongoing low interest rates. However, despite the overall trend towards recovery, a full return to pre-pandemic credit activity will depend upon factors such as the vaccine rollout and the impact of the Delta variant of COVID-19. A renewed outbreak would likely cause setbacks in reopening and a corresponding slowdown in economic activity.
“While pandemic-related threats to the economy do remain, as Canada continues to reopen, we expect consumers to increase their spending and for the recent acceleration in new credit growth to continue. Lenders should consider ramping up their acquisition strategies and channels accordingly. Market competition for acquisition and share of wallet will be high, as debt levels remain well below pre-pandemic levels,” commented Fabian. “Accordingly, TransUnion Canada’s next annual Financial Services Summit, to be held on September 9-10 this year, will focus on enhanced strategies that lenders can leverage when prioritizing and preparing for future growth.”
1 Unless otherwise stated, the source of the information in this release is from the TransUnion Canada consumer database.
2 TransUnion CreditVision® score risk tier segment definitions: subprime = 300-639; near prime = 640-719; prime = 720-759; prime plus = 760-799; super prime = 800+
3 Source: Oxford Economics Research Briefing, July 13, 2021
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