The Bank of Canada kept its benchmark interest rate at one per cent on Wednesday.
By David Larock
Statistics Canada recently changed the way it calculates key economic data to bring its methods into line with agreed upon international accounting standards. As a result, the debt-to-income ratio for the average Canadian household shot up 11 per cent, literally overnight, to 163 per cent (a record high).
This has inspired lots of foreboding talk about how our “soaring” household debt-to-income levels are now higher than U.S. debt-to-income ratios were at the peak of their housing bubble. That may be technically true, but it is also totally misleading.
That’s because the standard method for calculating this ratio uses after-tax income, which isn’t a fair comparison because Canadian personal income taxes cover health care costs and American personal income taxes don’t. (To put this difference in perspective, according to my initial research the average American spends anywhere from 10 per cent to 20 per cent of their after-tax income on health-care related costs.)
While it has become fashionable to predict that Canada is headed for a U.S.-style housing crash, most economists still think that is unlikely and they use plenty of data to support their position.
To be clear, I readily agree that our household debt levels are too high and that’s why I have consistently supported the federal government’s attempts to reign in borrowing by changing the lending policies and regulations used by CMHC and OSFI. But that’s a far cry from believing that our debt levels are about to cause our houses to start spontaneously combusting. (Did I just give Maclean’s an idea for their next apocalyptic magazine cover … or have they used that one already?)
Before you start loading up on canned soup and fire extinguishers, consider this sampling of recent comments from the experts I read:
* A report by BMO economists in January 2012 first pointed out the flaw in using after-tax income to compare Canadian and U.S. debt-to-income ratio levels. Instead, they argued that using a debt-to-gross income ratio would provide a better apples-to-apples comparison. Using this revised methodology, BMO economist Sal Guatieri reported recently that Canada’s debt-to-gross income ratio (121 per cent) is still well below both the current (146 per cent) and peak (166 per cent) U.S. levels. That presents a very different comparison from the popular one being bandied about in much of the mainstream media.
* David Rosenberg, a well-known Canadian economist, wrote recently that our ratio of housing starts to the civilian population is “not far off the average of the last 10 years, whereas as in the U.S. back in the 2006-07 peak, that ratio was 25 per cent above the long-run norm.” In other words, Canada has not seen the kind of short-term spike in speculative real-estate investing/borrowing that we saw in the U.S. during the latter stages of their housing bubble.
* Mr. Rosenberg also notes that Canadian policy makers and regulators have been pro-active in responding to our rising household debt levels while their U.S counterparts were basically asleep at the switch until it was too late (hyperbole mine).
* Further to that last point, Benjamin Tal, an economist with CIBC, recently noted in an interview with Rob Carrick that overall Canadian household debt is now rising at its slowest pace in 10 years, while consumer debt levels are actually falling for the first time in 20 years. That kind of momentum makes for a trend in the right direction.
* In a separate report, Tal notes that the crash in U.S. house prices was far more extreme in cities with above-average levels of sub-prime lending, where prices corrected by an average of 40 per cent. This is more than double the average decline seen in U.S. cities with below-average levels of subprime loans.
“Eradicate subprime from the U.S. housing market and, instead of the most severe house price meltdown since the Great Depression, you get a soft landing.” By comparison, Canadian subprime loans account for about seven per cent of our total mortgage debt outstanding while U.S. subprime loans peaked at a little under 25 per cent of their total mortgage debt outstanding before their housing crash.
The bottom line: Like any informed observer who can see beyond his own short-term self interest to what is best for the whole economy over the long term; I am concerned about how ultra-low interest rates have pushed our household debt levels to record highs. But I reject the implication that we have driven over the debt cliff to financial ruin and are now in free fall just waiting to hit the ground.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. His posts appear weekly on his blog,
JUST LISTED - 2794 Connolly Street in West End Halifax. A beautiful set of up and down flats for $449,900. Great opportunity for owner occupied with rental income or for an income property. Located on a large corner lot at the corner of Connolly and Almon, the rents are currently lower than the rental market dictates. Book now for your private viewing!
I’ve knocked on a lot of doors in the last month and the thing I’m hearing the most is “we want to wait so we can get more in a year.” Though this may be true, it’s also a truism. Property goes up in value, within a healthy market at least, between 4-7% each year depending on area. So that is a given.
There is, however, one small issue many potential sellers don’t realize. Whether they are downsizing or upsizing, the cost of real estate they purchase will ALSO cost more money. So any move will be lateral.
Another important factor is that interest rates are at a 50 year low. If they remain static then great! But they’re only going to go back up. Therefore, any extra money made from hanging on to your property another year to maximize your return, could easily be lost by a spike in interest rates.
I just had a client who sold his home, in a healthy market, bought into a new one while locked into a ten year term. The move is lateral, but this person will be clearing off a mortgage that is not sustainable, moving to a home better suited and securing a better rate.
So, with all these factors clearly favouring a move this year, why then would you wait?
If you or anyone you know is considering buying or selling real estate soon, please have them contact me and I will gladly help explain the process to help your referral make the most informed and important decision.
Please visit my website for more information:
I’m usually a fan of the federal government. Though they typically make unpopular decisions, I firmly feel that, for the most part, the decisions they make are for the long term benefit of all Canadians. However, since the ‘Great Recession,’ Federal Finance Minister Jim Flaherty has been under increasing pressure from economists and the banking system to tighten lending rules around mortgages. A few rule changes have already been made, intelligently eliminating the 0% financing mortgage bundle. However, recent media reports Mr. Flaherty is considering increasing the minimum downpayment from 5%-7% and the maximum amortization period from 30-25 years.
In so doing, the federal government will be tightening its fist around the only lending practice that benefits Canadians in the long term - in direct contravention of the majority of their long term decisions. Foremost on my mind is the media hysteria around rising Canadian household debt. Economists declare it is rising faster than our cousins down south, and something needs to be done. However, in that same grain, the media fail to state that while our household debt is rising faster than our American cousins - our assets are rising faster!
What’s more, if household debt is becoming such a problem, why not tighten rules around credit card applications, or car loans, or retail credit cards? Purchases of vehicles, household goods and other merchandise does not increase in value over time. In fact, it is the opposite. By leaving the access to these higher interest and impulse purchase loans open and easy, the federal government is encouraging Canadians to spend money on items that will grant them no long term benefit, and will only succeed in sinking them deeper into financial ruin and un-sustainability.
That being said, low interest mortgages, which allow today’s growing young professional demographic to invest in appreciating property values, are being choked. Real-Estate purchases and financial investment in the financial markets are the only income generating purchases Canadians can make. And with the purchase of real property, there is the added benefit in the retail sector. Home owners will then hit to the department or speciality stores and buy drapes, appliances, televisions, etc. Not to mention the fact that as the real estate market continues to grow, so too does development based on demand. With that, comes more tax revenue. With more tax revenue comes more services, and so on.
Why is the federal government restricting access to the only sound purchase Canadians can make? Is it because of pressure from banks who want to make more money through higher interest on credit cards? Is it because they’re currently offering mortgages at a steal? Whenever the majority of a population of any country, in history, have been home owners, the economy of said country has seen dynamic growth and an increase in productivity. The reason? Pride of ownership, ambition and creating a larger sense of community.
Minister Flaherty, don’t give in to special interests or bank lobbying. Show Canadians you are looking out for their best interests and keep rates and lending rules as they are. If you want to do Canadians a favour, restrict access to bad credit and keep the big big spenders in check.
From CBC News - January 30th, 2012 The real-estate market in the Halifax area heated up after the announcement of a major ship-building contract, new figures show. The Nova Scotia Association of Realtors statistics show sales increased 34 per cent by November 2011, compared to a year earlier. Wayne MacIntosh, the president of the association, said he thinks it was a reaction to the $25 billion ship-building contract awarded by the federal government to Irving Shipyard in Halifax in October. He said the increase in sales came as listings decreased by four per cent. "That’s why our listings are down a little bit, because the sellers are holding off a little bit to see how things play out," he said. "The longer they hold off, they think they’ll be able to get a larger price for their homes." MacIntosh said there’s also a big demand for two-, three- and four-unit apartment buildings. He said there are not many of them on the market and those that are listed sell very quickly. Houses in the city’s North End — close to the shipyard — are especially scarce. Darlene MacLeod and her husband listed their High Street home on Nov. 21. It sold ten days later for about $6,000 under the asking price. "In that ten days, we had 15 people through the home," she said. Wayne Macintosh said people who had been undecided about home ownership made up much of the increase. "I think it finally caused buyers to get off the fence and get out there and purchase something before the prices went up," he said. For more information, contact: Andrew Murray firstname.lastname@example.org
North End houses hard to find
From CBC News - January 30th, 2012
The real-estate market in the Halifax area heated up after the announcement of a major ship-building contract, new figures show.
The Nova Scotia Association of Realtors statistics show sales increased 34 per cent by November 2011, compared to a year earlier.
Wayne MacIntosh, the president of the association, said he thinks it was a reaction to the $25 billion ship-building contract awarded by the federal government to Irving Shipyard in Halifax in October.
He said the increase in sales came as listings decreased by four per cent.
"That’s why our listings are down a little bit, because the sellers are holding off a little bit to see how things play out," he said.
"The longer they hold off, they think they’ll be able to get a larger price for their homes."
MacIntosh said there’s also a big demand for two-, three- and four-unit apartment buildings. He said there are not many of them on the market and those that are listed sell very quickly.
Houses in the city’s North End — close to the shipyard — are especially scarce.
Darlene MacLeod and her husband listed their High Street home on Nov. 21. It sold ten days later for about $6,000 under the asking price.
"In that ten days, we had 15 people through the home," she said.
Wayne Macintosh said people who had been undecided about home ownership made up much of the increase.
"I think it finally caused buyers to get off the fence and get out there and purchase something before the prices went up," he said.
For more information, contact:
Of all things to say at the beginning of the Christmas season, the head of our Bank of Canada states that Canadian household debt is higher, per person, than our cousins south of the border. He issued a warning to canadians not to rack up too much personal debt this year because we don’t know what’s coming next year. But how does this make sense?
If spending is curtailed this holiday season, which traditionally acts as a lynchpin for the whole year in the retail and elsewhere, and allows top banking and economic analysts to find out how healthy our economy is, then Carney is prematurely putting a halt on our economic potential for the new year and guaranteeing minimal economic growth. So, in a way, he is creating buzz that will lead to the fulfillment of his own prophecy.
I’m not recommending that Canadian consumers go crazy this Christmas. In our modern age, sometimes less is more, but I do not feel that our top banker has his head screwed on right, and is leading canadians down a path that will only make our economic situation worse. What he failed to mention, something that the Bank of Montreal figured out, is that while Canadian household debt is higher than that in America, the value of our assets is growing more than said debt.
Whether your money is invested in the markets, bonds, stocks, etc., or in the most stable financial investment, real estate, the value of these investments is keeping canadians financially stable. This means that canadians can easily afford to be as decadent as before, so long as they keep investing in the market and in real estate.
So, way to go Carney, you could have easily just ruined Christmas, and almost assuredly put a hold on the spending that makes this time of year critical for the Canadian economy. Too bad I can’t vote you out.