Household Debt & Market Crash Overblown

Sales have slowed in Canada’s largest markets, Vancouver and Toronto and the blame is being pointed to the new mortgage rules that were implemented this summer.  Though sales have taken a noticeable decline, prices have corrected only marginally.  However, the Canadian Association of Accredited Mortgage Professionals (CAAMP) published a recent report stating that the real impact has not been felt yet, and it will take time for it to digest through the market.

“Our concern today is the number of growing first time buyers who are now unable to get a mortgage. We worry that this is having a dampening effect on what was an already cooling market and we hope policy makers will give some thought to addressing the needs of this key sector of the market.” says Jim Murphy, chief executive of CAAMP.

The report determined that 17% of the high ratio mortgages funded in 2010 would not qualify today, including 11% of prospective high ratio homebuyers who wouldn’t qualify under the new 25-year amortization rule.

“The changes to the mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy.” says the report.

Though the rules may have been excessive and untimely, GluskinSheff economist David Rosenberg predicts we are going through a market correction rather than the over exaggerated market collapse that is being heavily publicized in the media.

Rosenberg has also provided 5 reasons why the Canadian household debt panic is overblown. For one, our debt ratio is closer to 118% than the recent data showing 165%, a percentage that surpassed the American ratio of the US 2008 bust. Rosenberg explains the percentage discrepancy is a simple healthcare equation. The remaining four reasons include our relative assets to debt, the amount of equity in our homes, wage growth, and better ability to handle debt round out the list.

It is obvious that doom and gloom sells, however, Canada as a whole is in a strong position relative to the rest of the world. Rates will remain low until other economic regions including Europe, US and Japan start to regain momentum. Our unemployment remains low with some markets experiencing exceptional activity such as Calgary, Edmonton, and Winnipeg.

It will remain important for Canadians to monitor their debt levels as rates will eventually increase. However, while interest rates remain low, retirees will need to source effective ways to grow their savings for the future.

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