Much of the focus on ballooning consumer debt has been tied to housing, but a new report from Moody’s Investors Service points to troubling trends when it comes to buying cars.
Comment: Stephen Poloz is frustrated with the former approach of forward guidance and wants to get back to more normal policy discourse
Bank auto lending has grown at a compounded annual rate of 20% since 2007, “significantly outpacing” the growth of even red-hot mortgages, credit cards, and lines of credit., according to the ratings agency report released Thursday. In seven years, vehicle loans have jumped from $16.2-billion to $64-billion.
Authors Jason Mercer and David Beattie warn that with household debt already at record levels, the concerted push into auto lending – buoyed by low interest rates and longer amortization periods that reduce a buyer’s monthly payments — has exposed Canadian banks to the risks of soured loans and lower recovery rates in the event of a downturn.
“If the economy takes a turn for the worst, we could see these loans becoming problematic for the banks,” said Mr. Mercer, an assistant vice-president at Moody’s.
High unemployment rates in past severe recessions suggest there would be “a sharp increase” in soured loans.
![FP1023_AutoLending_C_JR](https://wpmedia.business.financialpost.com/2014/10/fp1023_autolending_c_jr.jpeg?w=366&h=327)
“We are in a much more vulnerable position,” Mr. Mercer said in an interview, adding that some auto loans now extend for as long as eight years, up from a traditional three-to-five-year horizon. More depreciation means there’s less “collateral” to recover, putting the banks on the hook for higher losses.
Mr. Mercer said there are some parallels between the Moody’s analysis and concerns about the hot housing market that prompted federal officials to tweak the system with changes including shorter amortization periods.
“We see some similarities between the increasing terms in auto loans to the lengthening of terms in residential mortgages several years ago,” he said. “Instead of ‘buying too much house,’ borrowers may be ‘buying too much car’.”
Auto loans have taken a backseat to mortgage concerns among policy makers over the past couple of years, but there are signs the focus on them could be increasing.