Show Transcript
Many Canadian households are facing financial challenges because of the COVID-19 pandemic. Anthony Okolie speaks with Ksenia Bushmeneva, Economist, TD Bank, about the pandemic’s impact on our ability to save, borrow and spend.
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- Ksenia, COVID-19 is delivering a significant financial shock to Canadians at a time when our personal finances are already fragile. You mentioned in your report that Canadian households have had low savings rate. Is that problematic, and do you see that changing?
- That's right, Tony. We do know that over the last few years, Canadians have not been setting aside much for a rainy-day fund. And of course, in an environment of high household indebtedness, low savings rate is not ideal because what it means is that in the event of a negative income shock, households really do have very little cushion to deal with that.
On the bright side, however, while households have not been saving much directly, they have saving a significant amount indirectly through asset accumulation and by building their wealth cushion. So since 2009, household wealth had nearly doubled in Canada, and so that's important because households could use this wealth cushion to either pay down their debt or as a temporary income replacement if they lose their job or income. So that's good news.
In terms of the outlook for the savings rate, we think that the era of a low savings rate is largely behind us. So looking ahead, we will see a more elevated savings rate for Canadian households. We have already seen what would happen as consumer spending contracted significantly. But even looking ahead, we think that consumers will remain more cautious and spend less and save more, given the lingering uncertainty both with respect to employment and incomes.
ANTHONY OKOLIE: And so why is household wealth important to the recovery story?
- Household wealth is really important to the recovery story for a number of reasons. Overall, household wealth is an important indicator of household financial well-being and resilience to various shocks, as I had mentioned previously. And so wealth could be spent to pay down debt, or it could be used as an income replacement. But really, it enters so many various decisions by households, such as home renovation decision or their retirement planning and their children's education. And so you can imagine that a negative hit to wealth could really undermine consumer confidence, and this would have ripple effects on consumer spending.
As a result, the recovery could be significantly weaker and more protracted. By converse, if wealth could be mostly preserved, then that could really help to restore consumer confidence quicker and a healthy economy to bounce back to health faster than otherwise would be the case.
ANTHONY OKOLIE: And of course, when we look at the housing market, it's certainly been beaten up because of the COVID-19 pandemic. How will that impact household wealth going forward?
- That's right. So housing is very important for household wealth overall. We know that real estate accounts for roughly half of household. Wealth and so the outlook for housing will have important implications as well for the outlook on wealth more broadly. We have seen some green shoots in the housing market in May, as the economy began to reopen. So sales have really rebounded strongly. But without a doubt, there is still a long road ahead to full recovery for the housing market.
There is also a lot of uncertainty about the future. First of all, right now, 15% of mortgages in Canada are in deferral. And so the outlook largely hinges on how quickly these households can resume their regular payments. And secondly, because this is a health crisis, how quickly we recover largely hinges on how successful we will be in tackling the virus.
So given all these factors and the fact that the labor market will remain in recovery mode for some time to come, we think that both prices and sales will remain depressed next year. However, we think that the impact on prices will be manageable for most households, and they will retain a large chunk of their housing wealth that they have accumulated over the last few years.
- OK, now I want to switch a little bit from housing prices to housing credit, specifically. What are you seeing in recent trends there, and what's your outlook?
- Household credit had really plummeted in April, so this was the first decline in household credit that we have seen since the global financial crisis. And again, the main reason behind this is that consumer spending has slowed precipitously, and so consumer credit had declined. Meanwhile, mortgage credit, so far, has remained resilient. However, this largely reflects past strength in the housing market. And looking ahead, mortgage credits will decelerate as well.
So for the year as a whole, we expect significantly weaker growth in household credit. It will start to rebound towards the end of this year and into 2021. However, it will continue to be soft and likely trail growth in nominal disposable income, again, because households will likely remain more cautious than they have been in the past, the labor market will still not be fully back to health, and delinquencies will be higher.
ANTHONY OKOLIE: And we just have a few seconds left, but just see any relief for Canadians who might be looking to reduce their debt by paying down the mortgage, car loans, or credit card bills?
- Yes, there are a number of options available to them. So first of all, in terms of their income replacement, obviously, the government income replacement programs that have been rolled out will be very helpful in keeping up with debt payments, as well as deferral programs for mortgages and consumer credit offered by financial institutions.
Looking beyond that, a decline in interest rates will also offer a helping hand. We know that interest rates have declined for a very broad range of credit products this year, and so that will help to debt payments more manageable. It could also accelerate debt repayments for some products because less money will go towards interest payments, and more money will go towards principal repayment. So naturally, that would help them to pay down their credit faster.
ANTHONY OKOLIE: Ksenia, thank you very much for your insights.
- You are very welcome.
- That's right, Tony. We do know that over the last few years, Canadians have not been setting aside much for a rainy-day fund. And of course, in an environment of high household indebtedness, low savings rate is not ideal because what it means is that in the event of a negative income shock, households really do have very little cushion to deal with that.
On the bright side, however, while households have not been saving much directly, they have saving a significant amount indirectly through asset accumulation and by building their wealth cushion. So since 2009, household wealth had nearly doubled in Canada, and so that's important because households could use this wealth cushion to either pay down their debt or as a temporary income replacement if they lose their job or income. So that's good news.
In terms of the outlook for the savings rate, we think that the era of a low savings rate is largely behind us. So looking ahead, we will see a more elevated savings rate for Canadian households. We have already seen what would happen as consumer spending contracted significantly. But even looking ahead, we think that consumers will remain more cautious and spend less and save more, given the lingering uncertainty both with respect to employment and incomes.
ANTHONY OKOLIE: And so why is household wealth important to the recovery story?
- Household wealth is really important to the recovery story for a number of reasons. Overall, household wealth is an important indicator of household financial well-being and resilience to various shocks, as I had mentioned previously. And so wealth could be spent to pay down debt, or it could be used as an income replacement. But really, it enters so many various decisions by households, such as home renovation decision or their retirement planning and their children's education. And so you can imagine that a negative hit to wealth could really undermine consumer confidence, and this would have ripple effects on consumer spending.
As a result, the recovery could be significantly weaker and more protracted. By converse, if wealth could be mostly preserved, then that could really help to restore consumer confidence quicker and a healthy economy to bounce back to health faster than otherwise would be the case.
ANTHONY OKOLIE: And of course, when we look at the housing market, it's certainly been beaten up because of the COVID-19 pandemic. How will that impact household wealth going forward?
- That's right. So housing is very important for household wealth overall. We know that real estate accounts for roughly half of household. Wealth and so the outlook for housing will have important implications as well for the outlook on wealth more broadly. We have seen some green shoots in the housing market in May, as the economy began to reopen. So sales have really rebounded strongly. But without a doubt, there is still a long road ahead to full recovery for the housing market.
There is also a lot of uncertainty about the future. First of all, right now, 15% of mortgages in Canada are in deferral. And so the outlook largely hinges on how quickly these households can resume their regular payments. And secondly, because this is a health crisis, how quickly we recover largely hinges on how successful we will be in tackling the virus.
So given all these factors and the fact that the labor market will remain in recovery mode for some time to come, we think that both prices and sales will remain depressed next year. However, we think that the impact on prices will be manageable for most households, and they will retain a large chunk of their housing wealth that they have accumulated over the last few years.
- OK, now I want to switch a little bit from housing prices to housing credit, specifically. What are you seeing in recent trends there, and what's your outlook?
- Household credit had really plummeted in April, so this was the first decline in household credit that we have seen since the global financial crisis. And again, the main reason behind this is that consumer spending has slowed precipitously, and so consumer credit had declined. Meanwhile, mortgage credit, so far, has remained resilient. However, this largely reflects past strength in the housing market. And looking ahead, mortgage credits will decelerate as well.
So for the year as a whole, we expect significantly weaker growth in household credit. It will start to rebound towards the end of this year and into 2021. However, it will continue to be soft and likely trail growth in nominal disposable income, again, because households will likely remain more cautious than they have been in the past, the labor market will still not be fully back to health, and delinquencies will be higher.
ANTHONY OKOLIE: And we just have a few seconds left, but just see any relief for Canadians who might be looking to reduce their debt by paying down the mortgage, car loans, or credit card bills?
- Yes, there are a number of options available to them. So first of all, in terms of their income replacement, obviously, the government income replacement programs that have been rolled out will be very helpful in keeping up with debt payments, as well as deferral programs for mortgages and consumer credit offered by financial institutions.
Looking beyond that, a decline in interest rates will also offer a helping hand. We know that interest rates have declined for a very broad range of credit products this year, and so that will help to debt payments more manageable. It could also accelerate debt repayments for some products because less money will go towards interest payments, and more money will go towards principal repayment. So naturally, that would help them to pay down their credit faster.
ANTHONY OKOLIE: Ksenia, thank you very much for your insights.
- You are very welcome.
