In “Mortgaged to the Hilt: Risks From The Distribution of Household Mortgage Debt,” authors Craig Alexander and Paul Jacobson expose pockets of vulnerability by going beyond national averages and focusing on the distribution of house mortgage debt by income, age and region, all of which matter most when assessing risk.
“Household mortgage debt has risen dramatically and traditional economy-wide averages understate the degree of financial risk for those that carried mortgages because they typically divide the value of mortgages across the income of households with and without mortgages,” says Alexander.
While debt may be rising, one broker has only seen business booming this year.
“I’ve had the best year overall for 2015 that I’ve had in my career,” says Joy Pike, broker/owner of VERICO Mega Mortgage Inc. in Mississauga, Ont. “And I don’t see it slowing down next year.”
The endless talk of the real estate bubble bursting has been around for years, Pike told MBN
, reflecting on when the bottom of the U.S. housing market dropped in 2008-2009, it only translated into a slow decline in the Canadian market.
“I don’t see any bubble bursting here and homes not being worth anything tomorrow,” says Pike. “There is a lot of fear out there, but I still believe the quicker clients can get a home, the better off they are to start growing their equity.”
Using data from the Survey of Financial Security, the C.D. Howe Institute authors find that the primary mortgage debt-to-disposable income ratio has climbed from 144% of income in 1999 to 204% in 2012. However, this also understates the degree of financial risk for a significant minority of households.
The author's analysis suggests that a significant minority of Canadians having taken on a high degree of financial risk. The portion of mortgage indebted households with a primary mortgage debt-to-disposable income ratio in excess of 500% has climbed from 3% in 1999 to 11% in 2012.
Additionally, the authors find that roughly one-in-five of mortgage indebted households have less than $5,000 in financial assets to draw upon in response to a loss of income or to higher debt service costs. One-in-10 mortgage-indebted households have less than $1,500 in financial assets to address any shock. This represents an inadequate financial buffer, as average mortgage payments are more than $1,000 a month, before taxes and operating costs.
For those in the alternative lending space, higher interest rates will mean a booming 2016 when homeowners come knocking looking to consolidate their debt and refinance.
The federal government should pay close attention to several pockets of risk in the Canadian housing market, according to a new C.D. Howe Institute report.