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Is mortgage debt surge responsible for pushing Canadian consumer debt levels higher?
For many people in Canada, a house is the centre of the family’s financial world. As a result, if the family’s financial situation changes, the house, and the mortgage that goes with it, become the focus of the family.
Is mortgage debt pressing consumer financial debt higher in Canada?
Equifax Canada recently reported that it is. One effect of the pandemic is that Canadian credit card usage and debt are dropping, as families borrow more cash right for their homes while spending less on everything else.
In this Brandon Blog, I offer some thoughts on why is mortgage debt rising, pushing total Canadian consumer debt above pre-pandemic levels, while credit card debts are falling during the COVID-19 pandemic.
Is mortgage debt surge pushing Canada consumer debt to $2.1 trillion?
Those in the real estate sector in Canada will certainly agree that the housing market is one of the greatest financial factors that influence the success of the Canadian economy. These days, the sector is exceptionally competitive which has a great influence on the housing market.
Competition among residential real estate buyers is fierce in many markets throughout the nation, especially British Columbia and Ontario. The pandemic has actually stimulated a record boom in Canada’s housing market. Low rates of interest, as well as brand-new demand for a larger home, have actually sustained bidding battles for houses.
What’s behind the record-breaking growth in the hot housing market in Canada? Is mortgage debt behind the increase in mortgage debt? Yes, according to Statistics Canada. It stated last Friday that Canadian families incurred a new high level of mortgage debt in the 2nd quarter in a row. Canadian households added record mortgage debt amid low interest, high prices.
Driving hot markets in many regions aided move real estate prices and the average sale price higher, pushing the need for home loans to $34.9 billion in the 4th quarter of 2020. This need beat the previous high of $28.7 billion in the 3rd quarter, Statistics Canada reported.
Is mortgage debt growth making Canada’s economy vulnerable? The central bank says yes
What is the Bank of Canada‘s worries? The Bank of Canada said that growing mortgage debt makes Canada’s economy vulnerable.
High household debt, as well as inequalities in the real estate market, have escalated in the past 12 months, leaving the economy more prone to economic shocks. The central bank said that although consumer debt had actually dropped in early 2020, a boost in housing debt has more than balanced out that decrease, with total household debt climbing sharply since mid-2020.
That is one reason why, effective June 1, 2021, the Office of the Superintendent of Financial Institutions (OSFI, Canada’s leading financial regulatory authority, elevated the home mortgage stress test level for mortgage applications through banks, insurance companies and credit unions. It does not yet apply to private mortgages.
The stress test was raised so that borrowers must now be able to meet the financial test to carry a mortgage at an annual interest rate of either 5.25 percent or 2 points over the actual mortgage market rate they can get, whichever is greater. This will certainly make it harder for some to get approved for a home mortgage. The government hopes this will lead to reducing the pool of accepted borrowers as well as eventually, lowering residence rates.
The June 1 adjustment implies potential mortgagors will certainly need to prove that their finances can stand paying at that greater interest rate, no matter what rate a lender is willing to lend at. OSFI hopes that this adjustment will reduce either the number of buyers or the amount a purchaser can afford to pay given the mortgage financing available to them. The hope is that it will stem the higher pressure on house prices in the country.
Is mortgage debt the only reason Canadian household debt is so high?
As you can see from the above, mortgage debt is up but credit card debt is down. in fact, it is at a 6 year low. So is mortgage debt the only reason total household debt is up? When I speak of mortgage debt, I am talking about conventional mortgage debt. The answer is no.
Equifax Canada also reports that other big-ticket credit products like credit lines have likewise represented a general increase in Canadian financial debt. She said there was a 60 percent rise in house equity credit lines! Like mortgage debt, this is a secured debt registered against the borrower’s home.
People are borrowing these additional home equity lines of credit. The worry is if rates of interest rise, individuals may not be able to pay the debt servicing costs and the debt payments for that financial obligation. Those kinds of loans are usually at a variable interest rate.
My take on why is mortgage debt and other household debt driving in these directions?
It wasn’t an interest rate boost that forced Canadians to get consumer spending in check – it took a pandemic for many of us to transform our spending practices. Stay-at-home orders, lockdowns, nowhere to go and fewer places to spend our money have all contributed to what we are now seeing. Couple that with many Canadians being able to work from home and Canada’s COVID-19 Economic Response Plan.
Consumer spending shifted away from credit card spending. My personal view is that people’s spending patterns shifted away from consumer goods that normally would be charged to credit cards. Perhaps some of the increase in home equity lines of credit was to consolidate debt by borrowing against their homes to pay down high rate credit card debt.
Also, people were hunkered down working, going to school and generally living 24/7 in their homes. We all got to see the points we love about our home and perhaps noticed for the first time, or at least were bothered for the first time, with little imperfections in our homes. That could lead to increased borrowing in order to do additions or renovations.
It also could lead to selling the existing home and buying a different one and moving. Maybe that drove more demand than there was supply, which caused home prices to continue rising. Increased pricing required increased mortgage application numbers, mortgage borrowing, the individual size of mortgages to increase and drove total mortgage growth. Perhaps FOMO also contributed to the increased demand.
This is merely conjecture on my part, but one thing is for sure. The pandemic could not stop house prices from rising, mortgage debt from increasing and credit card debt from reducing. Overall, household debt increased. The worry now is if interest rates rise, it will take a larger proportion of household income to meet debt servicing requirements. Hopefully, everyone’s household budget will be able to handle it.
Is mortgage debt now the focus for many Canadians?
Apparently so. I hope that you found this Is mortgage debt now the obsession for many Canadians Brandon Blog interesting. If you are concerned because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option, call me.
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We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic.
Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.
