By Matthew McClearn – Cana­dian Business

Canada’s hous­ing mar­ket con­tin­ues to amaze. Recently the Canada Mort­gage and Hous­ing Corp. (CMHC) reported that hous­ing starts picked up in Sep­tem­ber, dri­ven by mul­ti­ple starts in British Colum­bia, Que­bec and Atlantic Canada. (Mul­ti­ple starts refer to con­dos, apart­ments and other multi-unit struc­tures.) The sea­son­ally adjusted annual rate of starts stood at 205,900 units in Sep­tem­ber, up from 191,900 in August and well above expec­ta­tions. Mean­while, prices for new and resale homes con­tinue set­ting records.

Such strong demand for hous­ing is a pow­er­ful elixir for the econ­omy. That’s because houses need con­crete foun­da­tions, soft­wood fram­ing, asphalt shin­gles, win­dows and a ver­i­ta­ble army of work­ers to assem­ble and install it all. Recent home­buy­ers also go hunt­ing for fur­ni­ture, appli­ances and plenty of other big-ticket items to fill out their new digs. These forces helped Canada weather the reces­sion of 2008–2009 rea­son­ably well, even as other coun­tries such as Britain and the U.S. plunged into tur­moil from which they’ve yet to emerge. And now, many com­men­ta­tors expect Canada’s hous­ing mar­ket is set for a repeat per­for­mance, help­ing deliver the coun­try from the cur­rent global turmoil.

Call me a killjoy, but I’m any­thing but enthused about our cur­rent level of hous­ing activ­ity. It would be won­der­ful if it were sus­tain­able. It isn’t.

The rea­son, as any alert reader will read­ily sur­mise, is that our hous­ing mar­ket is as reliant on healthy credit mar­kets as a junkie is on a ready sup­ply of heroin. Over the last gen­er­a­tion con­sumers have been on a one-way street toward greater indebt­ed­ness, both in absolute terms and rel­a­tive to their incomes. Accord­ing to Sta­tis­tics Canada, the ratio of house­hold debt to dis­pos­able income stood at just under 150% at the mid­dle of this year. (Res­i­den­tial mort­gage credit reli­ably accounts for about two-thirds of total house­hold debt; the rest is com­posed of lines of credit, credit card and other con­sumer debt instru­ments.) This level approaches that wit­nessed in the U.S. and Britain just prior to the col­lapse of their respec­tive finan­cial sys­tems and hous­ing markets—a sober­ing thought.

Our aggre­gate house­hold debt fig­ures loudly pro­claim a soci­ety of debt addic­tion, but they don’t tell us other cru­cial facts. The house­hold debt-to-income fig­ure includes New­found­lan­ders and British Columbians, fresh­man uni­ver­sity stu­dents and pen­sion­ers, debt-free misers and hedo­nis­tic mani­acs. To fully appre­ci­ate this addic­tion, we need to know who’s shoot­ing up. The answer: vir­tu­ally every­one. Econ­o­mists at TD issued a report on Tues­day reveal­ing that house­hold debt has increased across all age groups dur­ing the last decade, both in absolute terms and rel­a­tive to income.

To say house­holds are “highly indebted” is just another way of say­ing they’re vul­ner­a­ble. Peo­ple skat­ing close to the finan­cial edge have lit­tle breath­ing room in the event they lose their job, for exam­ple, or if some­thing that’s impor­tant in their lives (such as gaso­line, food or inter­est pay­ments) sud­denly becomes more expen­sive. If some­thing unex­pected hap­pens, they’ll be abruptly forced to change their spend­ing behav­iour. One thing seems cer­tain: in a con­sumer debt cri­sis, demand for homes would dry up. That’s been the expe­ri­ence in the U.S. and Britain, and there’s no rea­son to think Canada would be any different.

Even absent a hous­ing cor­rec­tion, there’s rea­son to worry. The Inter­na­tional Mon­e­tary Fund is the lat­est voice to sug­gest high house­hold debt will act as a drag on eco­nomic growth in the years ahead. “On the domes­tic front, con­sump­tion might mod­er­ate more than expected from a large retrench­ment in highly indebted house­holds amid con­cerns of a drop in house prices,” its econ­o­mists noted in a recent out­look report for the West­ern hemi­sphere. “The lat­ter are esti­mated to be above lev­els dic­tated by eco­nomic fun­da­men­tals in some key provinces.”

The Cer­ti­fied Gen­eral Accoun­tants of Canada is one of the more astute observers of house­hold finances. Its view is that the steadily dete­ri­o­rat­ing finances of Cana­dian house­holds now approaches a break­ing point, with sig­nif­i­cant impli­ca­tions for the broader econ­omy going for­ward. “Con­sumers may be relin­quish­ing their posi­tion as the dri­ving force in Canada‘s eco­nomic rebound,” the orga­ni­za­tion warned in its lat­est sur­vey of house­hold finances, released in June, “in some cases moti­vated by respon­si­ble avoid­ance of the per­ils accen­tu­ated by the reces­sion and slow­ing recov­ery; in oth­ers com­pelled by an inabil­ity to sus­tain con­sumer spend­ing in an envi­ron­ment char­ac­ter­ized by mod­est income prospects that do not cor­re­spond to mount­ing liv­ing costs.” That sounds to me a more rea­son­able assess­ment of Canada’s cur­rent predica­ment. Equally rea­son­able was TD’s assess­ment back in May: “While the recent mod­er­a­tion in debt accu­mu­la­tion is pos­i­tive, per­sonal finances still appear stretched, imply­ing that con­sumer spend­ing will not be the engine of eco­nomic growth in the com­ing quarters.”

Frus­trat­ingly, we don’t—can’t—know how long Cana­di­ans will be both will­ing to buy homes in sig­nif­i­cant quan­ti­ties and able to access cheap mort­gage credit. The two issues are clearly related. It’s true that our finan­cial sys­tem is health­ier than those of other devel­oped coun­tries. Some fear Cana­dian con­sumers would take a huge hit if inter­est rates were to rise sharply. But while it seems appeal­ing to con­clude that what goes down must go up—that today’s ultra-low rates are an anom­aly that must nec­es­sar­ily return to his­toric norms—we should remem­ber it isn’t nec­es­sar­ily so. Sus­tained low rates in Japan proved that under cer­tain cir­cum­stances, low rates can per­sist for many years. That said, we should not rely on hot sales of Van­cou­ver con­dos and Toronto town­houses to carry us through another dif­fi­cult eco­nomic patch. If they do it will be dumb luck. If they don’t a great deal of Cana­dian smug­ness shall vanish.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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