Tag Archives: residential mortgage
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.
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.