Real estate is one of just three Ontario business sectors to register an increase in insolvencies last year. A 5 per cent jump from the 2019 level is discordant with the prevailing trend, which saw a 24 per cent drop in combined household and business insolvencies in 2020, despite a record decline in employment and GDP.
Newly released analysis from the Financial Accountability Office of Ontario (FAO) ties this seeming incongruous outcome to active intervention from governments and financial institutions to mitigate the economic impact of the COVID-19 pandemic. Low interest rates, flexibility to defer payments and various relief programs synergized into what the FAO characterizes as “exceptional” circumstances in a recessionary period. Notably, nearly 70,000 insolvencies were registered in 2009 versus 34,751 in 2020.
“Historically, insolvencies increase during recessions as financial problems emerge and deepen, making it difficult for households and businesses to meet debt obligations,” the FAO report observes.
Instead, disposable household income increased 9.6 per cent “reflecting significant support from the federal government” and the three sectors experiencing the greatest pandemic-related job losses — transportation and warehousing, wholesale and retail trade, and accommodation and food services — all recorded fewer insolvencies than in 2019. Most dramatically, the construction sector enjoyed a 76 per cent decrease in insolvencies, while there were 24 per cent fewer insolvencies among professional and technical services firms.
Nevertheless, the FAO cautions Ontario insolvencies could spike upward as relief and deferral programs are phased out. Already, many businesses are confirming that they are unable to take on more debt.
About 30 per cent of business operators in the accommodations/food services and arts/entertainment/recreation sectors suggest they could be forced to shut down within the next 12 months. For the latter, that’s on top of the 11 per cent uptick in insolvencies that the sector registered in 2020.
The FAO notes that 2020’s insolvent businesses were generally in a financially precarious state before the COVID-19 pandemic occurred, but many more businesses are likely to be embattled coming out of the pandemic. Meanwhile, the percentage of residential mortgages in arrears remained steady at 0.1 per cent throughout 2020, and job recovery and interest rates are tagged as key factors in the post-pandemic period.
“As of the fourth quarter of 2020, lower interest rates helped reduce average consumer monthly debt payments by 6.2 per cent for those without a mortgage and by 3.4 per cent for mortgage holders compared to a year earlier,” the FAO reports.
Accordingly, it links rising consumer insolvencies prior to the pandemic to a contrasting trajectory of interest rates. On average, debt service costs accounted for 8.3 per cent of household income in 2019.