David Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News
If you want to look beyond the incendiary headlines about housing bubbles in Canada’s largest real estate markets (see Macleans on newstands for the latest), last week’s report by the Bank of Canada (BoC), called Household Finances and Financial Stability Review, is worth a read. The report highlights several areas of concern, but it does not suggest any imminent collapse in house prices.
Here is a summary of the key points I took away from the report (with my comments added in italics):
There is inherently more risk when low interest rates induce young borrowers to enter the housing market earlier than they otherwise would. The length of their borrowing life cycle means that young borrowers are far more likely to face higher interest rates with a still substantial debt load in the future. When BoC Governor Carney and Finance Minister Flaherty repeatedly remind Canadians that “interest rates will go up”, they are looking straight at today’s young buyers.
Those are some risks worth worrying about. But before we all start storing canned soup and building bunkers in the hinterland, the report also offers some encouraging points to keep in mind:
Interesting point from a Bank of Montreal report last week: While average house prices have risen more quickly than nominal GDP (a proxy for average income levels) over the last ten years, the reverse was true in the prior ten years (when nominal GDP rose faster than house prices). I was surprised to see that when you look back over twenty years, nominal GDP and house prices have both grown by an average of 4.7%.
1) A relaxation of mortgage underwriting standards. (At its peak, U.S. sub-prime borrowing accounted for 14% of outstanding mortgage borrowing versus 3% in Canada.)
2) Easier access to borrowing that was secured against home equity.
While I think we should be concerned about the effect that increased borrowing against home equity is having on our overall debt levels, the most widely reported statistic about Canadian debt-to-disposable income ratios being higher than they were in the U.S. at the peak of its housing bubble is actually quite misleading. A recent BMO report laid this comparison bare when it showed that Canadians can contribute much more of their disposable income to debt servicing because they do not have to cover substantial costs, such as healthcare, from their after-tax earnings (as Americans do). When BMO used a more apt comparison, debt-to-gross income, it showed that our debt levels are nowhere close to where U.S. levels peaked. Furthermore, even today, U.S. debt-to-gross income levels are substantially higher.
In other words, the BoC still thinks our house price appreciation is supported by sound fundamentals.
Five-year Govern
Variable-rate mortgages still aren’t being offered at discounts that I think would justify their risk/reward trade-off.
The bottom line: While there are apt comparisons to be made between Canadian and U.S. borrowing trends, I think articles that suggest we are on the brink of a U.S- style housing collapse should still be taken with a healthy dose of salt. In the absence of salt, read the BoC’s latest report.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave