The last 10 years have seen a spectacular boost in home equity in Canada. More than half of the increase Canadians' net worth since 2000 has been from home equity. The wealth of homeowners has been growing in recent years, while that of renter households has declined, according to Canada Mortgage and Housing Corp. (CMHC).
But household debt is also rising at a pace faster than disposable incomes, and that is causing some concern. While low interest rates have been great for the housing market, and the government's stimulus program to encourage renovation had its desired effect and kept contractors very busy, now Canadians have to pay their debts.
Recently the Vanier Institute of the Family, an Ottawa-based research and educational organization, warned that Canadian's debt-to-income ratio has been steadily climbing for the last 20 years, and that the number of households that have fallen behind in their mortgage payments by three or more months is up nearly 50 per cent since the beginning of the 2008 recession.
The federal government has reacted to rising debt levels by tightening mortgage lending requirements, including the elimination of amortization periods longer than 30 years. The renovation subsidy program has also expired.
While critics suggest that Canada's banks are guilty of promoting over-spending in the first place, a report from TD Economics says that despite rising indebtedness, the falling cost of borrowing has been pulling down the share of income households have been shelling out to service obligations. Low interest rates have also helped to keep a lid on the share of vulnerable households in recent years.
The TD report says, We do not believe that there is a household financial crisis in the making in any region. It particular, the stage appears to be set for a moderation in the pace of household debt growth. A combination of higher interest rates and recently announced changes to borrowing rules…should act to keep housing market conditions in check going forward.
The report says interest rate increases are expected to be gradual, affording households some time to adjust and that household incomes are expected to grow at a decent 3.5 to four per cent on average over the next few years.
An earlier report from Scotiabank Group says that the relative increase in Canada's debt-to-asset ratio over the last decade has been much more modest than in the U.S., the U.K. and Australia in large part because the increase in debt has been backed by rising assets, including real estate.
CMHC says home equity accounted for 61 per cent of the increase in net worth of Canadians from the first quarter of 2000 through the third quarter of 2009.
The federal housing agency says that even with large numbers of households opting to buy homes in recent years, mortgages accounted for a smaller share of total household debt in 2009 than though much of the 1990s, and the share rose only modestly in the past decade. The aging of Canada's population helped curb the rate of increase in mortgage debt. While many households were taking on mortgages in order to buy homes, others were paying down and even discharging their mortgages. In 2001, 71 per cent of baby boomers who owned homes had mortgages, a fraction that had declined to 66 per cent by 2006.
It says that from 1999 to 2005, the median net worth of homeowners rose 27.4 per cent after inflation, in sharp contrast to the 5.1 per cent drop experienced by the median renter…The gap between the wealth of owners and renters has been widening for at least two decades. One of the reasons for the large gap has to do with age. Older households have had time to pay down debt and see the value of their homes appreciate, and homeowners on average are older than renters.
Another bank economist, Robert Hogue of RBC, says that housing affordability will erode during 2011 and 2012 as interest rates climb slowly. Like most other economists, he doesn't expect a crash in house prices. Overall, the era of rapid home price appreciation of the past 10 years has likely run its course and we believe that Canada has entered a period of very modest increases.
A BMO mortgage survey found that two in three homeowners say they will be able to handle it if interest rates rise, but 18 per cent said they might have trouble. If you are considering buying a house, BMO says total housing expenses should not consume more than one-third of total household income. Anyone thinking of buying a house should stress-test the payments they might have to make at a higher interest rate to make sure they can afford it.
For those who are having problems with budgeting and just can't figure out where all the money is going, the Financial Consumer Agency of Canada has a new interactive budget calculator that will help you with the math. The calculator is divided into categories that prompt users to consider every possible source of income, savings and expenses, says the FCAC.