More Homeowners, More Debt

Never before have so many Canadians owned homes. And never before have they owed so much for the privilege.

Interest rates at or near historical lows combined with low unemployment and recent changes that allow people to buy houses with less money down and pay off mortgages over longer periods resulted in 68.4% of Canadians in the housing market in 2006.

That’s up from 65.8% in 2001 and 60% in 1971.

The increase comes despite the fact that the cost of housing in many cities has gone through the roof, outstripping inflation by far, while median incomes have essentially flatlined.

Low mortgage rates have helped offset much, but not all, of the impact of rising house prices in recent years on mortgage debt-service costs.

The overall result has been a small increase in the percentage of Canadian homeowners who spend more than 30% of their gross income on shelter costs.

But the latest CMHC figures show a sharper spike in mortgage-carrying costs in terms of after-tax income.

In 2007, average household spending on monthly mortgage payments had reached 37% of after-tax income, up from 32% in 2006.

That’s significant — mortgage-carrying costs are increasing.

This burden is heavier on the shoulders of first-time buyers because they don’t have the equity.

Most analysts see little comparison between the Canadian housing market and its American counterpart, where hundreds of thousands of homeowners suddenly found themselves in way over their heads, creating a financial meltdown.

Canadian financial institutions jealously guard the number of mortgage defaults they endure. But among the country’s big banks, only about 0.27% of homeowners were three months or more in arrears on their payments.

Anecdotally, we are not seeing any rise in arrears or defaults across the country.

Canadian underwriting standards by lenders and mortgage insurers are much more thorough than they are in the United States. Canadian lenders are much more conservative.

One key factor in the rise of home ownership is the relatively new option of mortgages amortized over 40 years.

Paying off loans for homes over a longer period means much higher total interest costs, but lower ongoing monthly payments. The effect is increased affordability. Growth in such long-term mortgages has been nothing short of dramatic.

Between the fall of 2006 and fall of 2007, 37% of all mortgages carried amortizations longer than 25 years, up from 9% in the preceding period.

Too many people, especially younger buyers, are taking on too much debt to buy into the housing game.

Low interest rates coupled with 40-year amortizations and negligible down payments might make it easier to buy higher-priced homes, but it’s also leaving buyers vulnerable.

The inevitable conclusion is that the current Canadian real estate market is floating on a sea of unrepayable, and perhaps unserviceable, debt.

In total, Canadians owe close to $850 billion on their homes, more than double what it was a decade ago.

If trends continue as expected, the value of all outstanding mortgages will surpass the $1-trillion mark sometime toward the end of next year.

Ottawa is keeping a close eye on developments.

We’ve seen a trend toward longer amortizations and smaller down payments, and that is a matter of some concern.