Household debt.......

  From TMG, mortgage blog...

Thurs Sept 13th, 2012

Is household debt a threat to our economy?

Here are the facts:

1. Canadian household debt is indeed equal to 154% of disposable income
2.  The housing market is softening and prices are going down in many areas of the country
3. Canadians will be impacted by higher interest rates

Even given these facts; it’s unlikely that Canada will experience a financial crisis.

Household debt has been increasing steadily over that past 30 years as interest rates continue to decline but, for the most part, Canadians gear their borrowing to what they can afford.  Jobs are holding steady and business is confident about future prospects. So, lower interest rates mean less money goes to servicing debts.

In accumulating debt, Canadians also have a large asset, namely their homes. And although some in the financial community are concerned about the massive debt, Eric Lascelles, chief economist at RBC Global Asset Management recently said that assets outweigh debt by a factor of five.

It’s true that high household debt does put homeowners at risk but a closer look at the stats tells a better story. Overall Canadians exercise fairly good judgment when it comes to borrowing. The more vulnerable – seniors and low-income earners -- carry lower debt loads. It’s also true that the housing market carries a big part of household debt,  however the percentage of income earmarked for mortgage payments is not burdensome.

The new mortgage rules will certainly have an impact on the housing industry as will declining house prices; and interest rates will rise. Perhaps this will lead to some weakening of the economy. Delinquencies might increase a bit but the risk of the economy going into a recession is low. High-ratio mortgages are insured and our sub-prime market is small.

As for the weaker growth, Flaherty has said that the government could increase its deficit to shore up the economy. “If we ran into a serious world economic crisis arising out of the European situation, or something else, “he said, “Then of course we’d be responsive if we had to be to protect the Canadian economy and protect Canadian jobs as we have done in the past.”

From TMG Mortgage Group Blog...Aug 30th, 2012

The Affordability of Canadian Housing

Once again we have mixed messages in the media about the affordability of Canadian housing.  In March of this year, the Globe and Mail reported that housing affordability is improving in Canada due to house prices softening and low interest rates.

The Royal Bank of Canada’s (RBC) quarterly release found all housing categories became more affordable. This came at a time when there was considerable debate over whether some Canadians are overextending themselves by taking out mortgages they can’t afford – particularly in hot markets like Toronto and Vancouver.

At this point, housing in Canada was as affordable as it was a year prior. Then just last month RBC released its housing trend report and determined that increases in housing prices and mortgage rates have slightly eroded housing affordability in the second quarter of 2012. The report was released in the same week the Canadian Real Estate Association (CREA) predicted average home prices will fall 1.1 per cent this year, to an average of $359,100, before rebounding 0.9 per cent in 2013.

So what happened? Did prices go up or did they fall?

The RBC report found that affordability deteriorated in two of three housing categories – detached bungalows and two-storey homes – while condominiums were flat. The erosion of affordability levels in the first quarter of this year stemmed mostly from dramatic increases in a single market – Vancouver.
The Toronto-area market also deteriorated. Strong activity worsened affordability in Saskatchewan and Manitoba, and Atlantic Canada suffered a modest deterioration. Montreal and Alberta bucked the national trend by showing some improvements in affordability.

When we take a look at the resale market versus new home sales and especially the condo market, we get a much clearer picture of what’s been going on.  At the national level, the resale housing market, on the whole, appears balanced. The ratio of listings to sales stood at 6.1 months this past July and has shown little variation in almost two years. This stability, however, is hiding the recent softening in the Toronto and Montreal condo market and the entire resale market in Vancouver.

The softening in these three major metropolitan areas is also coinciding with a high number of homes under construction. In Toronto, for example, the number of condos unsold, which includes those that are pending construction, has surpassed the previous peak reached at the end of 2008. Clearly developers would like to see some of the supply sold before launching new projects. It’s the reluctance of these developers to move forward that will contribute to a decline in the overall construction of new dwellings across the country.

The unfortunate part is that these reports look at what has already happened, rather than at what is happening right now.  Mortgage brokers and Realtors across the country are reporting different levels of activity in different areas of the country following the overall pattern of activity already described. For example Atlantic Canada has slowed somewhat, yet centres like Halifax have increased activity. Part of Ontario has slowed but other areas have seen increases in sales activity. The one thing that has not happened is the market has not stopped.

We have not yet heard of massive foreclosures, which mean that households continue to pay their mortgages and their debts. House prices are coming down, interest rates are still relatively low and while it’s true that recent changes to the length of amortizations and the amount of equity a homeowner can take out of his or her home has had somewhat of an impact, as long as the economy keeps moving forward, it’s just a matter of playing the waiting game.   It’s not the worst of times.