The Great White North might have a problem controlling its housing debt addiction.
Compared to the United States, Canada consistently ranks as overwhelmingly reliant on its real estate market to keep the economy staying strong. This dependence on real estate mostly arose after Canada’s oil boom started to go bust.
According to numbers crunched in a Canadian housing report by Seth Daniels of JKD Capital, the nation of hockey, Mounties and poutine is not doing well. The chart below scopes in on the health of Canada’s 2015 market and uses side-by-side metrics of U.S. economy in 2007. It shows both similarities and disparities between both markets (2007 was one year before America’s “Big Short” market correction).
*FIRE: Financials, Insurance and Real Estate
** HELOC: Home Equity Line of Credit
Data courtesy of S. Daniels/JKD Capital
See those numbers highlighted in dark yellow? Those are important stats.
Keeping track of various debt-to-income ratios can benefit the average Canadian.
Canadians currently (as of late 2016) out-spend Americans on a debt-to-disposable income ratio of 168%. This means that for every dollar a Canadian earns, we are $1.68 in debt. Also, in 2015, the average Canadian debt-to-disposable income ratio was 165%.
The average American in 2016 had a debt-to-disposable income ratio of 101%. This means $1.01 serves as debt relative to every dollar earned. Even in 2007, Americans’ average debt-to-disposable income ratio hovered between 124% and 128%. In that same year, Canadians’ debt loads easily approached over 140%.
Though our countries once held similar GDP to household income ratios, nowadays Canadians have a 99.8% household debt of GDP ratio. Americans hold 78.8% debt of GDP.
America had its eight years of recessions, subprime mortgage defaults and social pitfalls only to now recover. The Bank of Canada and Canadian consumers should start quaking in their boots because we’re more vulnerable.
We got off the hook relatively unscathed in 2007 and 2008. However, we may not fare similar luck if 2017 marks a market bust.
Some executive real estate experts insist that Canada doesn’t have a housing bubble. Americans suffered through a market crash at lower debt numbers in a more stable economy. We shouldn’t kid ourselves: Canadian housing is severely over-leveraged.
Mortgages can’t be discharged in bankruptcy throughout Canada – well, except in Alberta. An article by Better Dwelling explores the vulnerability of the BC housing market. The belief of always-low interest rates and increasing home values has potential to harm local homeowners than overseas investors.
This mere fact should start ringing alarm bells to financial experts and consumers alike: the low-interest credit party might not last longer – with serious consequences ahead.
Canadian families spend on average 16 times their actual incomes (or 4.9 a person) on housing. In larger cities such as Vancouver and Toronto, Canadians pay higher percentages. Now, more than ever before, Canadian lenders finance HELOCs (Home Equity Line of Credit) at 65% of property values.
If you own a home that’s accrued worth over several thousands of dollars, reaching for the lifeline of a HELOC to tide paying bills will seem like second nature. However, even a small interest rate spike could leave most Canadians reeling once interest and principal amounts have to be repaid. In decades past HELOCs would only be used in extreme circumstances, though homeowners today seem to view it as supplemental income source rather than what it is: a second mortgage slash loan.
In conclusion, as reassuring as this all sounds, the average homeowner, homebuyer or property investor should still err on the side of caution.
1 Trading Economics: Canadian Household Debt-to- Disposable Income data:
2 Board of Governors of the Federal Reserve System (US), Household Debt Service Payments as a
Percent of Disposable Personal Income [TDSP], retrieved from FRED