Through most of this decade, Canadians have taken advantage of historically low interest rates and splurged on housing. Except now rates are rising and new regulations are making qualification arduous.
In other words, the honeymoon is over and the hangover has begun.
According to the Bank of Canada, Canadians owe about $1.70 on every after-tax dollar of income they earn annually. It stands to reason, then, that rate hikes could be too much to bear for many homeowners in this country.
According to Neville Joanes, chief investment officer at WealthBar, that would be deleterious to the housing market.
“If interest rates increase and individuals are not able to service their debt, it will lead to an increase in supply over sales and foreclosures, and that will lead to a decrease in the housing market from a residential perspective because supply will increase,” he said.
He also believes that homeowners with significant home equity or mortgage insurance would enjoy a measure of protection.
However, should things go awry in the housing market—In April, home values plunged 11.3% from a year earlier, according to Canadian Real Estate Association statistics—banks would reduce what they’re willing to lend against equity. Moreover, in a rising rate environment, borrowers attempting to refinance or access home equity to service household debt may find those options restricted.
“Selling may be their only solution,” said Joanes. “For an individual with a high level of consumer debt who’s unable to access the equity in their home and unable to meet their payment obligations, the only way to access equity may be to help refinance their personal circumstances or reduce their personal debt load. There are debt management services out there that help individuals reduce levels of high household debt.”
But Rakhi Madan, a Dominion Lending Centres Key Mortgage Partners broker, says household debt concerns are overblown in no small part because the Bank of Canada omitted a salient distinction.
“What the Bank of Canada is not addressing is how much of that $1.70 is unsecured and how much of it is from mortgages,” she said. “Secured debts you can get rid of. It’s an asset you’re holding. Every payment you make on a mortgage, depending on your interest rate, half is coming back to the equity in your house. You can sell secure debt but unsecured you pay from your income. That $1.70 is pretty nominal, so that’s why I feel like this is overblown.”
The ramifications of household debt levels, exorbitant as they may be, will likely remain shielded by steady housing appreciation.
“I don’t think Canada is headed for a housing-led recession simply because, even though household debt is high, housing prices are high and cities are transforming,” said Joanes. “If you compare major metropolitan hubs in Canada to those in the U.S. and those in Europe, they’re still not priced to that level and there’s still space for price appreciation in major Canadian cities.”
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