Canada's Housing Bubble

Feb 17, 2010 John Spears Toronto Star

Canadian families' household debts are at record highs, says a new study – and the consequences for some could be dire.

A modest increase in interest rates could push more than a million families to the point where they can't make their debt payments, the study published by the Vanier Institute of the Family says.

The grim report says that while technical economic measures show the recession is easing, many families are still mired in the effects of the downturn.

The average household in Canada carried $96,100 in debt in the third quarter of 2009, says the study by Roger Sauvé of People Patterns Consulting, who wrote the report for the Vanier Institute.

At that level, 6 per cent of Canadian households – or 825,000 households in all – were paying more than 40 per cent of their income on debt and interest payments. That's a red-flag indicator for the Bank of Canada, which estimates that one in four households making those heavy debt payments will ultimately default on their loans.

And Sauvé estimates that if interest rates climb 2 percentage points, as many as 1.5 million households will be in that situation.

It's a dilemma that's all too familiar to Sarah Anderson of the Daily Bread Food Bank, who agrees with Sauvé's assessment that the recession is far from over for families.

She says that three out of four food bank clients are paying 75 per cent of their income toward utilities and housing – either rent or mortgage payments. "That's a huge amount of money to be spending on that alone," she said.

It's one factor keeping many people from benefiting from the modest recovery.

"The people who were first affected by the recession are the last climbing out," said Anderson.

Sauvé's analysis agrees those at the bottom are still having a tough time – while the wealthiest 20 per cent of families are doing better.

"More of the income pie is going to those that already have the most," the study says

The richest 20 per cent of families have increased their share of total family incomes since 1997, the study shows. They now get 39.7 per cent of all income, up from 37.1 per cent in 1990.

All other groups are stagnant, or receiving a slightly lower share.

"There are long years of recovery ahead," Sauvé wrote.

"No one should conclude that recession worries are over in the homes across Canada.

"For far too many, there is too little income, too much spending, too little saving and too much debt."

In an interview, Sauvé said he believes real estate prices are due to drop. He noted that average house prices are now about five times average household income. If house prices drop to a more normal level of 3.7 times income, the average Canadian home would be worth just $250,000, rather than the current price of $340,000.

The report is at www.vifamily.ca/library/cft/famfin09.pdf