Spectre of household debt rises again

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Predictions of slowing markets and rising rates are not being voiced by just economic forecasters, but the CEO of the CMHC as well.

“Although residential mortgage arrears rates remain low and credit scores are strong, household debt remains a vulnerability that would amplify an economic shock,” says Evan Siddall, president and CEO of the Canada Mortgage Housing Corporation (CMHC). “In the event of a material increase in the unemployment rate, many households may need to access their wealth to make ends meet for a period of time.”

And with household equity being concentrated in a non-liquid asset such as housing, says Siddall, “the impact of such a shock could be amplified by the need to sell, resulting in a sudden glut of homes for sale, putting downward pressure on prices and eroding household wealth.”

Such concerns were expressed by Dominion Lending Centres Chief Economist Sherry Cooper, who told MBN that the boom days for mortgage brokers are gone – but that a gradually cooling housing market will be beneficial, as a continued boom would create a bubble that would eventually burst and ruin the market.

“If rates were to spike, it would be much worse,” said Dr. Cooper. “But what I do think will happen is that interest rates will edge slowly higher. Taking the extreme out of the markets is not a bad thing.”

High levels of household debt remain a key vulnerability to housing markets and financial stability, with the ratio of Canadian household debt to personal disposable income reaching a high of 164.6% in the second quarter of this year.

“People are buying on their equity – whether it is for the right or the wrong reasons,” says Gino Tieri, vice president of sales for Equity Financial Trust Company. “As homes appreciate, people believe they have access to more funds. But you don’t see incomes increasing.”

It is something that the CMHC has been keeping close tabs on, says Siddall, as the corporation has been working closely with the Department of Finance, Bank of Canada and the Office of the Superintendent of Financial Institutions to find ways to avoid contributing to household imbalances.

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