Apparently, when it comes to a potential ‘housing bubble’ here in Canada, “the only thing we have to fear is fear itself.”
Those words are from a new report compiled by Deputy Chief Economist Benjamin Tal of CIBC. Tal, and another well-known economist – Chief Economist of Gluskin Sheff + Associates, David Rosenberg – believe that the anxiety over Canadian consumer debt is exaggerated.
The report and their comments come amid continuous warnings from the Bank of Canada that consumer debt has reached record setting levels and exposes borrowers to significant hardship once interest rates inevitably increase.
The central bank has stated in recent weeks that it may raise interest rates to curb further borrowing. Of particular concern is the oft mentioned debt-to-income ratio, which has entered into the ‘debt danger-zone’ that helped trigger real estate crashes in the United States and Britain. The average household now has just 63 cents of disposable income for each dollar of debt.
But, Mr. Tal stated that less attention should be paid to the level of debt, and more to the speed at which it has been increasing. Referencing nations that had higher debt-to-income ratios during the recession, he added that in the previous three years, the ratio has risen at less than half the speed of the pre-meltdown era in the United States.
Tal also stressed that credit plays an instrumental role in institutional financing here in Canada, and as such, the quality of mortgages is much better.
David Rosenberg also pointed out several key items that differentiate the Canadian market landscape vis-à-vis our American counterparts, specifically: that disposable income in Canada is “distorted” because our health care is subsidized by taxes; Canadian homeowners have more equity in their home, the debt-to-asset ratio is below peak levels, and wage growth is double here than in the United States, ‘hardly impairing’ debt-servicing abilities.
Part of this is a result of higher mortgage underwriting standards (i.e. a higher quality of mortgage), but there is also a reduced degree of speculation in the Canadian market.
Tal believes that home prices will decrease over the next two years, but it will be a gradual decline as opposed to a crash.
In my opinion, as far as Benjamin Tal and David Rosenberg’s report and comments are concerned, I am in agreement in principle. Our economic situation, regardless of debt-to-income ratio, is vastly different than the American or British cases. The quality of mortgages in Canada is vastly superior to both the United States and Britain, due to higher underwriting standards, credit, income and equity requirements. In the United States, fully one-third of borrowers were in a negative equity position in 2005 and 2006, prior to the housing drop, and more than half of those mortgages had less than 5% in equity. This rendered them exceptionally vulnerable to even small market adjustments. Conversely, in Canada, approximately 15 to 20% of new mortgages have less than 15% equity, and there are no negative equity positions.
Another important trend to consider is that as Canadians have increased their debt levels, more have opted to a fixed rate mortgage to limit payment exposure as opposed to a variable mortgage. The opposite was true in the United States, where adjustable mortgages endured as the preference until the crash.
As I have stated previously, the Bank of Canada is posturing with its statement regarding raising interest rates. The fact is that the Bank of Canada will not increase rates without consulting other central banks, especially the Fed or the European Central Bank. At this stage, inflation is not out of control, and a raise in rates would hamper domestic growth via a drop in consumer spending and borrowing, which has largely insulated the Canadian economy from the effects of the global recession.
The next two years will be especially important in determining the direction of economic growth and market adjustments, but we should still take comfort in the knowledge that overall, our economy and the housing market are well positioned.
Regardless, if you’re thinking about making a switch, purchasing a home, or refinancing your mortgage, contact your REALTOR® & Mortgage Broker, or feel free to give me a shout, and I’ll be happy to chat.
REALTOR® and Senior Private Loan Specialist - Residential & Commercial
Century 21 Desert Hills Realty and EQ Lending Corp.
Broker/Owner of EQ Lending Corp.