The latest household debt stats have been released by Statistics Canada – and they reveal a trend of persistent consumer and mortgage borrowing across the nation. The average debt-to-income ratio hit 165 per cent in the fourth quarter of 2015, up from 164 per cent in the previous quarter. That means the average Canadian now owes $1.65 for every dollar they earn after taxes.
Total debt, including consumer credit and non-mortgage and mortgage-based loans, grew 1.2 per cent to $1.923 trillion at the end of last year – but a whopping 1.262 trillion of that can be attributed to mortgages.
This follows a report from TransUnion that finds the average Canadian credit card balance has hit $3,610 – a three-year high.
Cheap Borrowing to Blame
It’s not surprising debt – and particularly mortgage borrowing – continues to grow in Canada; consumers have been spurred to borrow by the central bank for several years, as record low interest rates have been the norm. The Bank of Canada (BoC) cut the cost of borrowing to 0.5 per cent last July, and prior to that it remained at 1 per cent for a full five years. Competitive mortgage lenders have made it practice to undercut one another with bare-bone basis point discounts each spring (fondly referred by the media as mortgage wars). Coupled with the rising cost of living and real estate in Canada’s biggest urban markets, many home buyers have had to leverage themselves to the hilt in order to break into the market – and with such a low cost of borrowing, they can.
It’s a double-edged sword for the central bank, which relies on manipulating interest rates to support the economy – higher when there’s an uptick, and lower to encourage the flow of money during a downturn. Oil’s toppling value led the BoC to go into duck-and-cover mode with a rate chop last January and, while an appropriate reaction, the resulting debt has raised its own red flag; BoC Governor Stephen Poloz has stated consumer debt remains a top vulnerability for economic recovery.
Low Rates to Last
However, the BoC has to be comfortable with the piling amounts of consumer debt, as low interest rates won’t be going anywhere soon. The central bank took a wait-and-see approach in the most recent interest rate announcement on March 9, stating that while GDP growth in the fourth quarter of 2015 was better than expected, “low level of oil prices will continue to dampen growth in Canada and other energy-producing exports.” Raising rates now would only lead to shock borrowers and lead to an onslaught of mortgage defaults – causing the economy a great deal more hardship than the current debt-to-income status quo.
In fact, speculation persists that interest rates could even enter negative territory should the economy dip lower. Following the ECB’s move to slash rates into the negative and up quantitative easing, a new Citigroup report shares Canada could be next to take such extreme measures with monetary policy.
Mortgage Debt Continues to Grow
Mortgage-driven debt, which accounts for the lion’s share of Canadian indebtedness, will continue to grow along with housing demand across Canada. While markets are softening in regions hard-hit by the oil downturn, they are defying gravity in Vancouver and Toronto. Both cities have smashed winter sales records so far in 2016; sales were up 36.3 per cent and 21.1 per cent year-over-year in February, respectively.
And, with the average price of a detached house topping the $1-million mark in both markets, it’s clear mortgage rules introduced last year to cool markets are not have the desired dampening effect to temper high risk debt.
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“Sales were up strongly from the 15th day of the month onward as well, despite the new federal mortgage lending guidelines coming into effect that require at least a 10 per cent down payment on the portion of purchase prices between $500,000 and $1,000,000,” said Mark McLean, president of the Toronto Real Estate Board.
It was also recently reported by RBC that it now costs 109 per cent of the average Vancouver income to own a house there.
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