Juggling Dynamite

New data from Equifax shows that in the first quarter of 2023, Canadian businesses increased their credit card balances by 15 percent and lines of credit by 11 percent while the total balance outstanding on bank-issued installment loans fell 2.4 percent. See Businesses’ changing credit usage a “worrying trend”: Equifax.

Jeff Brown, head of commercial solutions at Equifax Canada, said the shift in credit usage by businesses is alarming.

“It’s not something we’ve seen in the past few years,” he said. “This is kind of like an early warning indicator.”

Instalment loans are generally used for growth and expansion, Brown said.

“You have to be spending money to be making money as a small business,” he said. “When you see a lapse in that, you see a growth in credit card spends, typically, it’s a sign of financial instability.

…With many businesses already holding extra debt from the pandemic, such as from government loan programs, racking up credit card debt could put businesses in a difficult hole to dig themselves out of, Brown said.

General conditions for businesses are getting tougher, said Pedro Antunes, chief economist at the Conference Board of Canada.

Businesses relying on short-term credit products is “not a good sign,” he said.

Falling average hours worked is leading consumer demand lower while housing inflation is keeping central banks hawkish for longer than in past cycles. Nasty combo.

Chris Harvey, Wells Fargo Securities head of equity strategy, and Frances Donald, Manulife Investment Management chief economist and strategist, join ‘The Exchange’ to discuss the case for a recession in the back half of this year, and the rationale behind the Fed’s pause. Here is a direct video link.

Many homes for sale in our area north of Toronto are priced in the $2 million range–many have been on the market for months now. If we do some math, we can appreciate why.

Online calculators allow us to model numbers. To buy a $2,000,000 home with 20% down (400k) at a mortgage rate of 4.99% over 25 years, one must have a household income of $400,000 and zero other debts. As shown below, the monthly mortgage payment would be $9,344, in addition to property taxes, utilities, repairs and maintenance–just for one’s shelter.

Only 514,450 Canadians had a per capita annual income of $200,000 or more in the latest data, according to Statista.

In April, the average Canadian home price was $716,000–the cost of an entry-level starter home in the most populated areas. To qualify for a conventional mortgage on the average Canadian starter home with 20% down ($143,000), one would need an annual household income of $100,000 with zero other debts (as shown below). The monthly mortgage payment would be $3,431 in addition to property taxes, utilities, repairs and maintenance–just for one’s shelter.
Less than 8% of Canadians (3 million out of 40 million) had a per capita annual income of $100,000 or more, according to Statista, and most of them are already carrying both mortgage and non-mortgage debt.

Who can afford to buy a home today in Canada? Very few.