Canada's Housing Bubble

Apr 24, 2011 canadianmortgagetrends.com

Canadians’ debt levels have made headlines repeatedly over the past few years. People are engrossed with how big our debt burden has grown, and what it means to the economy at large.

On Thursday, Statistics Canada published a new report on how debt is affecting Canadian families. It contains loads of data and below are some of its mortgage-related findings:

• In the last few decades, StatsCan says the general trend has been for “average household debt to move in the opposite direction” of interest rates. In other words, as rates fell, debt rose.
• Between 1984 and 2009, “real average household debt for Canadians more than doubled from $46,000 to $110,000, with the main contributor to this increase being mortgage debt.”

Growth-in-Household-Debt

• In 1990, “total personal and unincorporated business debt was equivalent to 93% of after-tax income. By 2009, total debt was equivalent to 148% of income.”
• Research by TD Economics (cited in the report) suggests that “if interest rates rise by three percentage points, the debt-to-income ratio needs to fall to between 125% and 130% for interest payments on the debt to remain the same.”
• StatsCan says the Bank of Canada considers households to be “at greater financial risk if their total debt payments are equivalent to 40% or more of their income.” By that measure, StatsCan estimates that “4.2% of all Canadian households had a high annual debt load.” (4.2% is a lot lower than some debt commentators might expect.)
• While debt-to-income was climbing parabolically, the debt-to-asset ratio was relatively constant between 1990 and 2007. Then, from 2007 and 2008 debt-to-assets jumped by 2 percentage points to 19.6%, the highest level in 35 years.

Being interested observers of the housing market, we’re naturally inclined to wonder how rising debt levels will affect home prices. Interestingly, while debt-to-income is at all-time highs, mortgage affordability (which has a major influence on home demand) hasn’t strayed far from its long-term average.

Mortgage-Affordability

The question is, what happens to affordability when rates climb further.

Other things being equal, for every 1% that mortgage rates increase, households with an average income and high-ratio mortgage can afford roughly 9% less house.

Unless incomes rise significantly (few are betting on that), a rate-driven deterioration in affordability could curb home prices materially...and much more than any growth in non-housing debt.