Beware the Hidden Risks: How Non-Mortgage Debt Delinquencies Could Shake Canadian Markets

The Canadian economy is at a crossroads. While mortgage delinquency rates remain historically low, a quieter crisis is brewing in non-mortgage debt—a ticking time bomb with implications for consumer spending, equity markets, and sectors like real estate, construction, and hospitality. This article examines the vulnerabilities and offers a roadmap for investors to navigate the storm.

Sector-Specific Vulnerabilities: Where the Pain Lies

1. Real Estate and Construction:
The construction sector faces a perfect storm. Ontario, Canada's economic engine, saw non-mortgage delinquency rates surge 24% year-over-year in Q1 2025, driven by auto loans and credit card defaults. This reflects broader financial strain among households and small businesses. Meanwhile, commercial mortgage-backed securities (CMBS) in hotel and retail assets—critical to hospitality—show lingering weakness. Over 19 CMBS loans remained in forbearance as of May 2025, with delinquencies concentrated in Ontario and Quebec. For construction firms reliant on commercial lending, this signals a tightening credit environment.

2. Hospitality and Small Businesses:
Hospitality is doubly vulnerable. CMBS data reveals that hotel assets in key cities face occupancy and revenue shortfalls, exacerbated by rising operational costs. Compounding this, younger workers (18–25 years) saw credit card delinquencies jump 21.7%—a group disproportionately employed in low-wage hospitality roles. As consumers cut discretionary spending (e.g., dining, travel), businesses in this sector face a liquidity crunch.

3. Auto Loans: The Canary in the Coal Mine:
Auto loans are an early warning indicator. Delinquency rates for borrowers under 26 surged 30% to 1.95%, signaling that younger households—often the backbone of consumer spending—are nearing breaking points. With average non-mortgage debt per Canadian hitting $21,859, defaults here could trigger a broader collapse in discretionary spending.

Impact on Consumer Spending: The Domino Effect

The data paints a grim picture:
- Reduced Discretionary Spending: Canadians are already cutting back. Credit card spending fell by $107/month in Q1 2025, with Ontario, BC, and Alberta slashing discretionary spending by 6–7%. This directly impacts sectors like hospitality and retail.
- Credit Card Reliance: Consumers are increasingly resorting to minimum payments. The average credit card pay rate (the portion of balances paid in full) fell to 52.9%, a 3.1% drop from 2024. This signals a shift toward debt management over spending.

A correlation between rising delinquency rates and market volatility could emerge as consumer sentiment weakens.

Equity Market Risks: Sector Exposure and the Sell-Off Looming

Investors should brace for sector-specific pain:
- Consumer Discretionary Stocks: Firms in travel, restaurants, and retail (e.g., hotel chains, casual dining brands) are most exposed. A prolonged spending slump could hit their margins and valuations.
- Real Estate Investment Trusts (REITs): Hotel and retail REITs face declining occupancy and rents, while construction REITs may see project delays as credit tightens.
- Small-Cap Banks: Lenders with heavy exposure to non-mortgage loans (e.g., credit cards, auto loans) could see rising loan-loss provisions, pressuring profitability.

A divergence here could signal market mispricing of risk.

Investment Strategy: Defend, Diversify, and Hedge

1. Defensive Stance on Consumer Discretionary:
- Reduce Exposure: Sell or avoid stocks in vulnerable sectors like hospitality (e.g., hotel operators), casual dining, and discretionary retail.
- Rotate to Essentials: Shift funds to consumer staples (e.g., groceries, healthcare) or utilities, which are less sensitive to spending cuts.

2. Short-Term Hedging Strategies:
- Inverse ETFs: Consider shorting ETFs tracking REITs (e.g., iShares Canadian REIT Index ETF) or consumer discretionary sectors.
- Credit Default Swaps (CDS): For sophisticated investors, CDS on corporate bonds tied to construction or hospitality firms can hedge against defaults.

3. Monitor Key Metrics:
- Track CMBS delinquency rates for hotels and retail (target a threshold of >2%).
- Watch the TSX Consumer Discretionary Index for signs of a sell-off.
- Monitor the average non-mortgage debt per consumer—a rise beyond $22k could signal further strain.

Conclusion: A Precautionary Tale

The Canadian economy's reliance on consumer spending and credit-fueled growth is now its Achilles' heel. Rising non-mortgage delinquencies in real estate, construction, and hospitality sectors threaten not just corporate balance sheets but broader market stability. Investors ignoring these risks risk significant losses. The playbook is clear: pivot to defensive assets, hedge against sector-specific defaults, and stay vigilant. The next downturn may not be about mortgages—it's about the debts we've forgotten to count.

Stay informed, stay cautious, and stay ahead of the curve.