We’ve all done it, used an online mortgage calculator to see the maximum we can afford to pay for a house at the current interest rates. For some its just curiosity, but for others its justification to get into a more expensive home, simply because the calculator says we can.
This concerns the Bank of Canada Governor Mark Carney who’s painting an increasingly bleak future for the Canadian housing market. Although soft in his chosen words his message at a recent speech to the Vancouver Board of Trade was clear, when rates go up, we are in trouble. Carney highlighted again that the single biggest investment most Canadians make is their home. It represents almost 40 percent of the average family’s total assets. The big problem, many Canadians are living in homes they won’t be able to afford once interest rates start to rise.
Right now the interest rate is paused at 1 percent. Carney would like to see that number return to a normal level of 4 percent. But he remains concerned about the current record level of household debt Canadians are carrying. As money remains cheap debt levels continue to rise. This week we learned Canadians owe a record $1.5 trillion. That equals $176-thousand of debt for each family of four or $44-thousand per person. The majority of this debt is mortgage.
Here’s the scary part, we are now carrying more debt per person than our American neighbours and most of us have no back up plan when mortgages rates start to rise. Despite all the stringent rules and our banks bragging how they kept Canada out of a debt crisis, the situation is just as bad as our friends south of the border. The only difference? The so-called mortgage bubble in the U.S has popped but Canadians are still feeling invincible to the rest of the world’s economic woes and continuing to borrow at staggering rates. Our current debt to income ratio is 146.9 percent.
The rapid recovery we have seen in our housing market after the recession is also weighing in on Carney. Since the housing market bottom in early 2009, prices are back to pre-recession levels after only 2 years. If you can remember, after the recession in the early 1990’s, it took ten years for housing prices to recover. So the current recovery is not normal. The same cannot be said for our employment picture. Since the recession Canadians are working more hours, for less money and in more temporary jobs. This with the added access to cheap money is leading to a lack of forward planning for many Canadians. Think about your own mortgage, can you afford to pay it if it was 6 percent higher. If not, would you be forced to sell, maybe at a lower price?
The term “housing bubble” is overused and it simplifies a grim reality that our prices cannot remain this high. At the current rates many markets are unaffordable, average home prices in Vancouver, Toronto and Calgary are well over $470-thousand.
So, what does this mean for Canadians worried about their own mortgage? It means we need to be honest about our current debt level. If you have to, downsize your home or consolidate your loans to protect your self from rising interest rates. Don’t let your debt become unaffordable before you react. Most importantly, if you are shopping for a new home, calculate your affordability at a much higher interest rate, it’s the only way you can determine your chances of affording your home for the long term.
Writer for RateSupermarket.ca