Canadian Household Debt Hits New Record High

Announced today from Statistics Canada, Canadian household debt hit another record high this quarter. The numbers have been slightly revised, but households on average owe 1.67 in debt for ever dollar of income earned.

So what does this have to do with Vancouver real estate?

Everything. Debt and cheap credit has been called the “drunken brew” fuelling real estate prices according to CMHC boss Evan Siddall. Massive mortgages and financially strapped Canadians is putting the Canadian financial system at risk. It’s why Canadian Finance minster Bill Morneau introduced the Stress Test and will likely introduce risk sharing with the banks in 2017. These costs will then get tacked onto your new mortgage in the very near future.

In fact, it’s household debt, 65.5% of which is from mortgages, that has the feds up at night. Which prompted RBC Economist Laura Cooper to say “the further deterioration in the oft-cited debt metric will serve to strengthen the Bank of Canada’s appraisal that elevated household indebtedness remains a key vulnerability to financial stability.”

Canadian debt levels
Canadian debt levels piling up

Yet there seems to be some confusion around household debt and the overall financial well being of Canadians. As per this chart circulating social media, it shows less than 1% of Canadian homeowners have negative equity. So what’s to worry about?

Canadian homeowner equity
Canadian Homeowner equity

For starters, Vancouver and Toronto real estate has done nothing but go up in recent years. In fact, Vancouver real estate is up roughly 50% over past 2 years. Meanwhile, It was only a few months ago the Bank of Canada said a 15% drop in house prices would leave 13% of mortgages underwater. A 25% correction would leave 23% of mortgages underwater.

Unbeknown to most homeowners, detached prices are down about 15% in many areas. As I highlighted in my post House of Debt, areas such as Newton which is the most indebted in all of BC had runaway price gains of 40% this year. A price correction of 20% for single family homes is already underway.

As prized economists and authors of the book House of Debt say “a close relationship has existed between the build up of credit during an expansion and the severity of the subsequent recession..We show that the economic costs of financial crises can vary considerably depending on the leverage incurred during the previous expansion phase.”

Any wonder the Canadian Government and CMHC are doing everything in their power to keep house prices from rising. As Vancouver slows one has to think their attention shifts to Toronto next.

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