Canadian real estate is sucking up the oxygen in the room once again, as rising rates pinch households. Statistics Canada (Stat Can) data shows households are spending a record share of their disposable income on mortgage payments. Rising prices and rates are consuming even more income for payments than during the 90s bubble. However, this isn’t a general trend as income spent on total debt resurfacing is lower than it was just a few years ago.
Canadian Mortgage Debt Is Taking Up A Record Share of Income
Canadian mortgages are taking up a record share of household income. Mortgage payments averaged 0.57 points higher over the past year to consume 7.66% of income in Q4 2022. That’s roughly $1 for every $13 in disposable income earned across Canada going towards servicing their mortgage debt.
Canadian Mortgage Debt Service Ratio
The share of Canadian household disposable income spent servicing residential mortgage payments.
Source: Statistics Canada; Better Dwelling.
It’s a big shift from the start of this decade, and higher than Canada’s last big real estate bubble. The last quarter was 1.57 points higher than the decade-plus low seen in Q2 2020, when rates were cut to record lows. The current share is also higher than the 90s real estate bubble, which peaked at 6.95% of income in 1991. Now when people say, “it’s always this hard,” you have a data point to shut them up.
The trend is a combination of the recent surge in home prices and higher interest rates. Rising rates have helped to slow, and reverse price growth—but it simply just hasn’t had enough time to bring prices low enough. Two years of record low rates inflated home prices higher than two months at this level can bring them down. That shouldn’t surprise anyone.
Households Are Spending A Smaller Share of Income On Total Debt
The good news is this isn’t a general trend amongst Canadians. The total debt service ratio, consumer and mortgage credit, is up 0.61 points to 14.33% of incomes in Q4 2022. Households are dedicating the largest share of income to debt servicing since Q1 2020, but it’s still a smaller share than households had in 2019. Not exactly a panic inducing level, and even more interesting with mortgage payments. Households are paying more on mortgage debt but less on other types of debt.
Canadian Debt Service Ratio
The share of Canadian household disposable income spent servicing debt payments.
Source: Statistics Canada; Better Dwelling.
Various reasons are behind this trend, including deleveraging and rising incomes. People paid down significant consumer debt over the past few years, with low rates bringing interest costs down. We’ve also seen incomes rise over the past year to keep with inflation, reducing the nominal burden.
Population growth is another interesting factor to consider, and we’ll discuss this further in depth later. Canada’s population boom is no doubt building credit service capacity that has to take out debt. This adds to the income column while consumer debt has yet to rise, helping to dilute the burden at the national level. Households are still highly indebted, there’s just more new households that have yet to take on debt.
Mortgages are taking up a greater share of income, but consumer debt isn’t. While this sounds like great news, it does leave questions about consumption. When paired with the elevated savings rate, we’re not seeing rising household consumption for anything but housing. That can be a sign the economy is further concentrating down the path of housing, leaving it more vulnerable to shock in the event of a sudden shift.
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Those numbers look low. Way too low. Unless every Canadian suddenly started making 250k+ a year
I’m curious to know if variable rate mortgages held by Canada’s big banks that have been re-amortized for as long as 40 years has been accounted for in this analysis? Folks caught in the 90s interest rate spike didn’t have such a option. Perhaps, the r/e troubles of the early 90s haven’t been topped quite yet?
We have more to go, if you are an investor or homeowner hoping to hold on, I would head for the exits. The point of this tightening is to purge the excess money from the money supply, this is done through wealth destruction and only the strongest will survive.
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