While there is no evidence that Canada is experiencing a housing bubble, there is plenty of evidence that Canadians are developing a greater and greater debt burden. A recent Vanier Institute of the Family study suggests that the debt-to-income ratio for households in Canada is at 145%. This is the highest it has ever been in the eleven years Vanier has been conducting the survey.
Image: Will Scullin / Flickr
The rise in indebtedness is likely related to the economy: when consumers lose their jobs, or are forced to take lower-paying or part-time work, their debt-to-income ratio rises. This year, the amount of household debt increased 6%, and mortgage debt increased at about the same rate.
Although it is expected for household indebtedness to rise in a recession, there are troubling signs that this indebtedness may be making some people more vulnerable to shifts in the market. Much of the rise in indebtedness is coming from first-time home buyers who are taking advantage of low interest rates and long amoritization periods. If this group of people are taking on too much debt relative to their income, their ability to service that debt may be compromised when interest rates start rising.
Another major problem is that jumping into the market right now could make the situation even worse for anyone who is having debt problems. The national average house price this year was five times the average after-tax income of a Canadian household. Over the last few years this has risen from an average of 3.7 times. Clearly, home prices are becoming less affordable for the average family.
And arrears are an issue, as well. Although the number of people who have not paid a mortgage payment in three months is still low, it has consistently climbed throughout the recession.
All of these facts are not very reassuring. However, what you should focus on is whether you are capable of handling the amount of debt you are taking on. Talk to your financial advisor before you think about buying a new home to make sure you are in a good position to weather any interest rate rises. And while interest rates are so low, consider paying down as much debt as possible.
Household indebtedness is rising, but don’t panic. Use this information as a wake-up call to make sure that you remain in the best financial position you can.
Nelson Goulart
Broker of Record with Signature Service GMAC Real Estate
www.ssgmac.ca
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