RBC: Insolvency levels likely to spike in the near future

Mortgage delinquencies could spike by at least 33% over the coming year, new report predicts

RBC: Insolvency levels likely to spike in the near future

The potential of a recession later this year, combined with the anticipated rise of the unemployment rate to 6.6% by early 2024, will likely drive more Canadians towards loan delinquency and insolvency, according to RBC Economics.

The conclusion of the federal government’s pandemic-era financial support measures accompanied a recent substantial spike in living costs.

RBC estimated that mortgage delinquencies could grow by at least 33% of current levels over the coming year, while consumer insolvencies are projected to see a 30% increase over the next three years.

The growth in consumer insolvencies would push them back towards pre-pandemic levels, “and likely remaining on an upward trajectory after that,” RBC predicted.

These trends will build on the debt that Canadians have accumulated during the pandemic.

“A booming housing market put mortgage debt on a fast track,” RBC said. “By late-2021, Canada’s household debt-to-income ratio had exceeded pre-pandemic levels. And it’s remained elevated ever since.”

Exacerbating these risk factors is the likelihood that any economic contraction will lead to labour market losses.

“We project our national unemployment rate will rise from the current 5% to 6.6% by 2024 Q1,” RBC said. “Historically, the loss of a job has been one of the principal factors contributing to loan delinquencies and consumer insolvencies in Canada.”

At the same time, RBC expressed optimism that any financial troubles will remain “relatively contained” to the short and medium term.

“The noticeable improvement in Canadians’ finances (in the aggregate) early in pandemic wasn’t sustainable,” RBC said. “Those gains are now reversing and will likely erode further amid a softening economy and higher interest rates. We expect the environment to remain challenging for years to come – but an all-out collapse is unlikely.”