Could This Pop Canada’s Real Estate Bubble?
Soaring household debt levels could pop Canada’s real estate bubble and threaten the country’s entire economy. At least, those are the findings from a report on Canada’s housing prices from the C.D. Howe Institute.
According to a paper published by the think tank on Wednesday, the combination of low interest rates and soaring real estate prices has inflated mortgage debt to $1.2 trillion since 1999. The situation, the report argues, has left young families and those in expensive markets, such as Vancouver and Toronto, vulnerable. Mortgage debt is at least 500% of disposable income in 10.8% of households in 2012, up from 3.4% of households in 1999. (Source: “Mortgaged to the Hilt: Risks From The Distribution of Household Mortgage Debt,” C.D. Howe Institute, December 9, 2015.)
“There are significant pockets of vulnerability created by the growth in mortgage debt in recent years,” wrote C.D. Howe researchers Craig Alexander and Paul Jacobson. “The majority of Canadians have been responsible in their borrowing, but the sustained low interest rate environment has encouraged a significant minority to take on considerably more mortgage debt relative to after-tax income.” (Source: “CD Howe touts tougher mortgage rules as households vulnerable to debt rises to 11%,” Financial Post, December 9, 2015.)
Ballooning debt levels are worrying. If consumers are struggling to manage their increasing liabilities now, a sudden change, like a job loss or higher interest rates, might leave many families in financial difficulty.
Soaring debt levels could also spell the end for Canada’s real estate bubble. The boom in the country’s housing market has been built on the backs of young families willing to take on ever-greater quantities of debt. Even a small hiccup could force hundreds of consumers into insolvency.
The report argues higher interest rates and tougher lending rules are needed to guard against the risks from a higher proportion of borrowers facing deep debts. Some new laws have already been proposed, such as increasing the required downpayment on expensive homes. However, such legislation may be too little too late for vulnerable households.
“Every quarter point rise in interest rates in the future will have a much bigger impact on household finances than in the past,” the report said. “The pace of tightening may need to be very gradual to limit the economic and financial risks. […] It [the Bank of Canada] should also look to raise interest rates when appropriate to reduce the incentive for households to take on higher debt loads.” (Source: Ibid.)