New household debt numbers from Statistics Canada combined with a softening in the Canadian housing market represent a real threat to Canadians.
The average Canadian household now earns only 63 cents for every dollar of debt—the highest ratio of debt to income ever recorded in Canada, and close to debt levels seen in the United States before the housing bubble burst in 2008.
While alarming, it also must be noted that Canadians on average hold a higher level of equity in their homes than Americans held prior to the housing bust. “With 70% equity, most Canadians are far better off than their American counterparts who held on average only 30% equity in their homes before the market melt down,” says Canadian debt management and credit expert Don Antle, President of DebtWorks Canada.
That having been said, recent changes in Canada’s housing market, along with the threat of rising interest rates, pose a serious threat to Canadians’ ability to pay their debts.
In June, Ottawa capped CMHC-insured mortgages at 25 years, down from 30 years, the equivalent of a 0.9 percentage point increase on a typical mortgage—an increase of $152 per month on a $300,000 mortgage, Antle says.
In 2011 some 40 per cent of all mortgages in Canada were amortized over 30 years. This is the third time in three years the government has moved limits down, first from 40 years to 35, then down to 30, and now 25.
Recent numbers in the Canadian housing market indicate the restrictions are having an impact. In September, resales in Canada dropped 15 per cent over the same month a year earlier, with markets such as Vancouver down 32.5 per cent, and Toronto down 21 per cent.
While prices have generally not been effected, according to the most recent reports, it seems inevitable that a pull-back is in the works.
With less equity in their homes, and the possibility of higher mortgage payments due to shorter amortization periods and rising interest rates, more Canadian households will start to feel the squeeze.
According to the BMO Housing Confidence Report 72 per cent of respondents already say they would feel significant strain from a slight increase in mortgage payments, and 16 per cent say that a 10 percent increase in mortgage payments would mean they likely would be unable afford their home.
“Average Canadians are stretched to the max,” says Antle. “We see a growing number of people reaching out for help via debt settlements and loan consolidation.” Antle anticipates those numbers could accelerate.
Debt settlements have been getting more popular as debt-strapped consumers have been using credit counselors and debt management agencies to negotiate cut-rate debt repayment by using the equity in their home to get out of high interest rate loans such as credit card and department store cards, some of which carry rates of 30 per cent or more.
“If housing prices start to fall, those people will want to act more quickly to arrange for debt consolidation or debt settlement, while they still have substantial equity in their homes to draw on,” Antle says.
Other options available to consumers who find themselves over their heads in debt include debt management programs and bankruptcy, the latter being the most severe course of action. “In almost all cases credit counselors and debt management agencies can negotiate with lenders to get reductions in both interest and principal owing. Debt management programs typically get people out of debt and back to normal credit status within two to five years,” says Antle. Bankruptcy, on the other hand, stays with an individual for at least nine years, during which a person cannot get any credit whatsoever.
Bank of Canada rates are expected to start rising summer 2013 at the earliest and in the fall at the latest, according to most industry experts.
“Even a modest increase in mortgage rates will have a devastating effect on Canadian household debt,” said Antle, “with 21 per cent of all adult Canadians, almost 5,000,000 families and consumers, already reporting their debt as unmanageable any increases to mortgage rates alone are going to provide the tipping point.”
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