Fears rise that Canadian home buyers are in over their heads following the fastest monthly increase in housing loans on record
Canadians are piling on mortgage debt at a record pace.
On Friday, Ottawa reported the fastest monthly increase of housing loans on record as Canadians took out almost $18 billion worth of new mortgages, bringing the country’s total housing debt to almost $2 trillion.
While other forms of debt have decreased during the pandemic, the Canadian appetite for mortgage costs has persisted as the price of real estate skyrockets. Home prices have spiked in the past year, pushing even rural properties to new heights, forcing buyers to incur more and more expenses in bidding wars and insurance costs.
The Bank of Canada has warned repeatedly of growing household debt, using signs of overburdened consumers to justify new rules that make it more difficult to take out housing loans. Still, the cost of real estate has shown few signs of abating.
Jeremy Kronick, an economist at the C.D. Howe Institute, says the growing mortgage debt is the logical outcome of a red-hot housing market.
“The fundamentals here are pretty clear. Over the course of the pandemic there have been low interest rates, tight housing supply, and big increases in disposable income. At the same time, debt servicing costs are actually lower now than they were before the pandemic. So you combine all those things, and it’s not really surprising that people are taking on more debt,” said Kronick.
Over the past year, Canada’s total mortgage debt grew by 7.8 per cent. The rise has fuelled concerns that a growing portion of homeowners could struggle to pay off loans when the Bank of Canada inevitably raises interest rates, something it’s said will likely happen in the coming years.
Tiff Macklem, the central bank’s governor, recently warned that gains in home prices aren’t sustainable and that interest rates won’t always be at historic lows. Already, the central bank has indicated that rates will likely rise next year when inflation subsides. If inflation continues its rapid growth — rising 3.6 percent in May — experts have warned that the bank may have to hike interest rates sooner.
Taking on larger mortgages puts households in a risky situation should the economy falter, says Pedro Antunes, chief economist at the Conference Board of Canada.
“The real risk is around a housing market correction, I think. We’re starting to see home prices declining and there’s a real risk this could unravel more than we expect,” said Antunes.
The average sale price for a home in Canada has grown by 38 per cent over the past year, according to the Canadian Real Estate Association (CREA). Toronto home prices jumped to an average of $1.1 million in May, while smaller cities and rural areas have seen increases as high as 50 per cent in one year.
There are some indications of cooling, with total Canadian home sales falling 7.4 per cent month over month in May. And Antunes says the Conference Board of Canada is expecting a modest correction in housing costs in the coming months.
But CREA says there’s little relief in sight, predicting a steeper climb of 19.3 per cent to an average price in Canada of $677,775 by the end of the year.
“A significant correction could do a lot of damage, by setting back household confidence, wealth effects and a hit to consumer spending,” said Antunes.
Total credit to households was up by 0.9 percent in April, to $2.49 trillion, marking the fastest month-over-month rise since 2011. Ron Butler, a mortgage broker at Butler Mortgage, has said that some buyers have likely turned to the alternative market to seek out mortgages from non-federally regulated lenders and bear the risk themselves.
- By Jacob LorincBusiness ReporterMon., June 21, 2021