Money is a limited resource. There is a reason why the Bank of Canada oversees the country’s monetary policy. If there’s enough liquidity in the market, people and businesses tend to borrow. Increased borrowing translates into spending and the resulting debt may turn into a long-term liability.

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In the midst of a pandemic that has ravaged not only the Canadian economy but every developed and emerging market, the domestic housing sector seems to be swimming against the tide. It is creating wealth for sellers even as other sectors of the economy grapple, leading to a high unemployment rate of 8.2 per cent.

Behind this housing market growth, sometimes termed hyperinflation, is easy and cheap debt available to Canadians. For over a year now, the central bank has kept policy interest rates at a record low and despite inflationary pressures, any immediate hike is out of sight.

Another critical factor is the high household savings owing to wage subsidy and other allowances doled out by the federal government. This pandemic stimulus was, however, never intended to fire up the housing market. It was meant to boost demand across sectors because subdued demand can push the economy into depression, besides dealing a body blow to job creation.

According to Equifax, a multinational credit reporting agency, the credit card debt of Canadians is at a six-year low. However, mortgage debt is rising fast, accounting for a large chunk of total household debt. British Columbia and Ontario, which have the hottest housing markets, have seen the biggest hike in consumer debt, as per the agency.

The situation is perplexing. Credit card debt, which customarily should have surged given joblessness and inflation, is down and mortgage debt, which essentially translates into a bigger chunk of income going toward repayment, is up.

CREA confirms average house price in Canada surged by 38 per cent year-over-year in May 2021, despite moderating house prices over the past two months. Clearly, people are bidding more to acquire a new house, which has squeezed out groups like new Canadians, youth and single parents. Many of them will be renting spaces acquired at high prices, leading to increased rental payouts that can hurt this group and curb their spending capacity on other goods.

Central bank warns of high mortgage debt

Less than a month ago, the Bank of Canada warned about the damage soaring house prices can cause to the broader economy. Firstly, since mortgage debt is offered at a variable rate, servicing debt can become costly once the central bank decides to hike benchmark rates. Secondly, mortgage debt curtails the spending capacity of households by a significant margin.

Tiff Macklem, governor of the central bank, has categorically termed imbalances in the housing sector as the “biggest domestic vulnerabilities”. Wealth has been parked in housing assets, inadvertently leading to a sizeable drop in household consumption.

The central bank said Canadian households are “loaded with mortgage debt”, a fact now corroborated by the latest Equifax report. The pandemic has yet to subside and the economy is yet to attain pre-pandemic employment and international trade fronts.

The biggest worry is that the twin elements of government subsidy and cheap credit fueling housing sector growth are anything but eternal. Cash support has already shot up the debt-to-GDP ratio, and to reign in fiscal slippages, the government can withdraw such measures anytime. The central bank also has limited elbow room to keep interest rates at near-zero levels in the wake of rising prices. In April, inflation surged by 3.4 per cent, the highest pace in almost a decade. The bank has said that the April price rise will not require “immediate action”; however, a rate hike cannot be ruled out in the medium term.

Marginal cooling down of the searing housing market over the past two months hints at some ongoing correction. If the Bank of Canada’s warning is anything to go by, the decline in household income will be coupled with a fall in housing prices. Any event like a stock market crash or hike in benchmark rates can lead to sharp repricing of mortgage debt exposure, the bank says. Higher debt servicing cost and reduced credit availability can bring down housing prices, something that recent stress tests failed to do.

Money is a limited resource and high inflation can further limit its supply. The cessation of government cash support will put pressure on household income. It can shape Canada’s housing sector in the medium term. Meanwhile, what is more worrying is the existing burden of mortgage debt on Canadian households.

The silver lining is the reopening of the Canadian economy and improved activity after vaccine rollouts.

7 COMMENTS

  1. Has anyone (or will anyone) noticed that it is the “savers” who are paying for all of this spending – by making virtually NO RETURN on their savings while inflation is increasing and our nation’s stability is getting even shakier after Trudeau’s spending orgy??????
    You can bet that concern will never make it to the floor of our House of Commons!

  2. House prices have risen exponentially, yes. But what are people supposed to do? Rent is now as much as a mortgage payment so if you want a place to live you gotta pay up. If someone has an option perhaps they could mention it to me.

  3. I literally was reading this and wondering the same thing Robert Atkinson!

    There are more variables at play here than what has been stated. Where’s immigration playing into this? That’s a huge factor! The government has been approving PR applications this whole time. I’ve been told by clients that they increased the cost of the application which makes sense to get more revenue faster. So many of those individuals may not be in Canada atm! Since Canada is still politically stable and HAS HEALTH CARE in comparison to where the new comers are coming from, it offers safe/less risky investments, the new comers will come with a lot of cash to invest, once the economy opens up and people can move around freely, we will continue to see growth.

    Also considering consumer preferences have changed since the beginning of covid, you already touched upon it with their need to expand their living spaces. Now imagine those coming from areas of uncertainty into a market that offers stability, you would assume to see more growth in small businesses which are the backbone of any economy! We have already been seeing a lot of small businesses pop up during covid to fill in short term demand. The mention of birthday cards, lol so true and these small businesses filled that short term demand. Its not just CERB that’s holding these households up, we need more data but lets be serious, a lot of people are working for cash right now and probably won’t claim it so they can continue to get CERB. A lot of people are also investing their CERB in stocks etc, that’s a more risky approach but many have made a lot of money since the start of Covid.

    ALSO lets talk about the largest demographic shift that’s HAPPENING RIGHT NOW! Baby boomers are retiring and don’t have many options on where to spend their money! Here’s an idea, you don’t think people are holding onto their mattress money waiting for the economy to open up so they can be spend freely and enjoy their retirement? That means more money supply in the market.

    OHHH almost forgot, why mention inflation and not talk about it? Anyone who understands inflation, knows that its best to invest their cash/ wealth into real estate that will only continue to move with inflation protecting their purchasing power/dollar value. With the high fixed costs to build at the moment, this will keep prices up anyways. Then couple that with inflation…i rather hear that more people have Mortgage debt BECAUSE ITS good debt…interest rates aren’t going up for a long time – that wouldn’t make any sense.

    Put people in a tight situation and they will find a way!

    I truly dislike articles like this because these are unprecedented times, why try to make this sound so cut and dry when it’s not that simple! More data models need to be analyzed and that’s assuming the data collection is accurate. All this does is provide inaccurate information to those who are seeking financial stability and could cost them an opportunity to invest in their futures. We need to educate consumers, smarter buyers provide for more market stability.

    Thanks for coming to my Ted Talk ahahaha

  4. “The situation is perplexing. Credit card debt, which customarily should have surged given joblessness and inflation, is down and mortgage debt, which essentially translates into a bigger chunk of income going toward repayment, is up.”

    It’s perplexing? Really? Literally everything non-essential was closed for months meaning no leisure activities were available, no events, no travel, I couldn’t even buy a birthday card for a period of time so how perplexing is it that people were not spending? There is over $80B in excess savings in personal accounts and $90B in business accounts.

    People noticed that with a vaccine available, it was a great opportunity to move. Leave behind their small sub 500 sq ft condo and gain some space so they could work from home without losing their minds. This is why the suburbs spiked in value and now, we will see the core of the GTA increase in value as immigration re-opens and people once again become social.
    I think you missed the mark with this article.

  5. “servicing debt can become costly once the central bank decides to hike benchmark rates”??… I don’t think that will happen anytime soon because if it does, the gov’t wouldn’t be able to pay increased interest costs on the exploding debt, especially with all the recent debt incurred for the social handouts. The central banks hands are tied and interest rates will have to stay low for a long time. No one knows how this will unravel.

  6. Credit card debt went down and mortgages went up would be from everyone refinancing with super low rates. Roll it all into one payment made a lot of sense.

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