Canadian Mortgage Updates

Last month, Statcan reported that over the past few decades, Canadians have been taking on more debt. This is in the form of mortgages and other credit products. Part of the reason is the continued low interest rate environment. As rates have been falling, the debt load has been marching in the opposite direction. The attractive rates are lulling Canadians into thinking that credit is easy money and they are happy to add to their debt burden.

According to the Statcan report, the real average household debt stood at $110,000 in 2009, which was more than twice the amount seen in 1984. The bulk of the household debt consists of mortgages. Statcan warns households of financial risk if their total debt loads are in excess of 40% of their incomes. Are Canadians taking on more debt that they can afford? It appears to be the case.

The Globe & Mail has just reported that homeowners in Alberta are already having a tough time meeting their obligations to service their mortgages. The Calgary market especially has seen a volatile real estate market in the last decade. Depressed property prices over the last five years have resulted in many homeowners facing negative equity situations in their properties. Although the mortgage repayment scenario is not as alarming as what is being seen in the U.S., it is a cause for concern for Canada.

The article states that compared to the rest of the country, Albertans are more likely than the rest of the country to fall behind on their mortgages.  Canadian Bankers Association confirms the fact that there is a marked increase in the number of people who are failing to make mortgage payments, and this has not been seen since 1990.

The situation in Calgary highlights the fragile nature of the relationship between low mortgage rates and falling asset values. With the tendency to accumulate more household debt, Canadians are being exposed to delinquency.  This situation can get worse and become more widespread if interest rates were to rise in the near future.

With the threat of inflation and the lending institutions’ desire to eke out a better spread in this difficult economy, mortgage rates are under pressure to move up. Rock bottom rates that we have been seeing cannot last indefinitely. When they begin to move up, even by one percentage point, they will extract a painful toll from Canadian households.

Canadians will do well to heed Statcan’s warning and keep their household debt within manageable limits. Buoyant real estate prices and historically low mortgage rates are keeping their debt afloat. If either of these supports were to witness a disturbance, then many homeowners could be scrambling for cover.