Income stagnation contributing to bruised credit: broker

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Heavier debt loads are contributing to greater numbers of Canadians with bruised debt looking in the alternative space – but one lender isn’t pointing the finger of blame at rising home prices.

“Bruised credit is definitely growing in this country,” says Gino Tieri, vice president of sales and marketing at Equity Financial Trust Company. “People are stretching themselves financially, we see it.”

Tieri is quick to point out that there isn’t a housing bubble on the horizon.

“It is straightforward economics,” he told MBN. “The value of homes may seem to be unrealistic; but if you look at the supply of detached homes and the population of Toronto: low supply, high demand – prices go up, that is economics. That is not what is driving this – it is the incomes that we have to be watching. Can people afford the million-dollar home? That is the question. How much are they willing to put at risk?”

According to a survey commissioned by Manulife Bank of Canada, Canadian homeowners are carrying an average of $190,000 in mortgage debt as home prices reach dizzying new heights in the nation’s large urban centres.

In Alberta – a province that has been hardest hit by the fall in oil prices – homeowners there carrying the largest burden of mortgage debt at $242,300.

Identifying the stagnation of wage increase as the root of the problem of consumer debt seems to be supported by a recent Equifax Canada’s Q1 2015 national consumer Credit Trends Report showing the average debt held by Canadians, excluding mortgages, has increased by 2.7 per cent to $20,910. While personal debt climbs, consumers continue to keep up with their payments as the national 90+ delinquency rate remains low at 1.12 per cent.

Contributing to the problem is the perception that consumers can borrow more as their home equity increases, says Tieri.

“People are buying on their equity – whether it is for the right or the wrong reasons – that is a personal judgment call that you make individually,” he says. “As homes appreciate, people believe they have access to more funds. But you don’t see incomes increasing.”

Tieri says that by looking back just 15 years, the gap between income growth and home price increases have changed.

“Income is not keeping pace. If you were getting a 2 per cent lift for cost of living as an employed person, a gap wasn’t significant against the increase in home value 15 years ago,” he says. “But now, if we were to graphically represent that, that gap is much wider than it has ever been. Incomes have not been keeping pace with the rising prices of homes – and the cost to operate those homes. So the propensity for those people being challenged is potentially coming.”

In Alberta – a province that has been hardest hit by the fall in oil prices – homeowners there carrying the largest burden of mortgage debt at $242,300.

Nationwide, consumer debt increased by more than $122 billion, which is up 6.9 per cent from $1.422 trillion a year ago. On a debt classification basis, installment loan and auto loan sectors are showing significant increases of 7.6 per cent and 4.2 per cent year-over-year, respectively.

Credit inquiries increased mainly in Western Canada, while activity in the East has decreased. Regina Malina, senior director of decision insights at Equifax Canada, believes that the full impact of lower oil prices is not fully reflected in the first quarter numbers.

“We're starting to see delinquency rate increases in Alberta, and even more so in Saskatchewan,” observed Malina. “Oil prices and future economic outcomes are still being debated, but the average debt and consumer appetite for new credit are still on the rise. Careful monitoring is more important than ever at this point in time.”

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