Canada's Housing Bubble

Feb 12, 2011 James Kwantes Vancouver Sun

B.C. households are the most vulnerable in Canada to interest rate hikes or an economic downturn, says a new report released Wednesday by TD Economics.

In fact, B.C.'s debt-to-income ratio — which compares all debt including mortgage debt to personal disposable income — is 160 per cent. That's the same level reached in the United States just before the financial crisis and housing meltdown hit.

Blame high housing costs on the West Coast, which have made British Columbians more sensitive to negative economic events. The U.S. comparison is also tempered by the fact that debt-to-income ratios in the most expensive states reached levels much higher than 160 per cent pre-2008, said Craig Alexander, TD's chief economist and co-author of the report.

"Higher interest rates over the next few years threaten to leave as many as one in ten households in B.C. in a position of financial stress," Alexander said in a phone interview. The 10-per-cent figure is based on TD’s projection of gradual rate hikes from the current one per cent to three per cent by the end of 2012.

"On the plus side, rapidly-appreciating home prices in the province has left the debt-to-asset ratio — a metric of household leverage — below the Canadian average," he said.

The first index to rank the financial vulnerability of households by province said Alberta, Ontario and Saskatchewan households are also at greatest risk to economic downturns such as "a substantial correction in housing prices, a major disruption in incomes or an unexpected large increase in borrowing rates."

But TD Economics said the probability of one or more of these negative events occurring in the coming years is relatively low. For the Vancouver market, TD expects home sales to decline nine per cent and prices to drop 1.4 per cent in 2011, Alexander said.

B.C. is also the only province where the average savings rate is negative.

The Household Vulnerability Index said risks related to household finances have been rising broadly across all regions over the past few years, and with higher interest rates on the horizon set to boost the cost of servicing debt, this upward trend in vulnerability is almost certain to continue.

B.C. has the highest debt-to-income ratio in the country, at 160.5 per cent. Alberta is second at 143.2 per cent, while the Canadian average is 127 per cent.

The report is also a cautionary signal for Alberta residents, who rank second in terms of relative vulnerability. While the level of the index is not significantly higher than third-place Ontario, "its rate of increase since 2007 has been unrivalled across the country, pulling the province closer to first place British Columbia," added the report.

"The increasing signs of household financial strain in Alberta — which is reflected in both higher and more sharply rising 90-day mortgage delinquency rates than in other regions though the absolute level remains quite low — take root in the legacy impacts of the implosion of the commodity and housing bubbles in 2007-08, which left many households exposed," the report states.

TD Economics' Household Financial Vulnerability Index takes into account six key metrics of household financial position. TD Economics assigned a weight to each metric based on perceived importance. Metrics include debt-to-income ratio (combined total of residential mortgages, lines of credit and other consumer loans as a percentage of personal disposable income); debt service percentage of income) and the proportion of households with a debt service ratio of 40 per cent or higher.

with files from Postmedia News

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