Boomers can quit saying buying a home was harder in the 1990s now. Statistics Canada numbers show mortgage debt service ratios (DSR) at the end of Q1 2018 have reached levels we haven’t seen in over 26 years. Despite near record low interest rates, the size of loans have pushed unaffordability to similar levels. This becomes more of a concern today, as interest rates begin to rise and the debt is concentrated.
Mortgage Debt Service Ratio
A mortgage debt service ratio (DSR) is the amount of gross income dedicated to servicing a mortgage. Gross means before taxes, so a good part of income not going towards the ratio is spoken for. In Canada we only measure the principal and interest payments officially. This means other required payments like property taxes, etc. are not included. Debt service ratios are deceptively low as a result, when the number comes from the government. Even mortgage brokers include those fees usually.
Debt service levels are important for a general outlook of the economy. The more money going towards servicing debt, the less money there is to spend on consumer goods and services. The less money floating around your economy, the harder it is for the economy to continue to expand. This is why a sudden boom in housing, often leads to a bust for the rest of the economy. The opposite is also true. Less money servicing debt, means more money is available to fuel other aspects of the economy. Now that you’re caught up, let’s look at that ratio.
Mortgage Debt Service Ratio
The mortgage debt service ratio (DSR) rose to new highs. The mortgage DSR rose to 6.67% at the end of the first quarter of 2018, up 6.89% from the previous quarter. The huge jump is seasonal, but the number is still up 1.83% from the same quarter last year. The ratio now sits at the highest level since the fourth quarter of 1992. The 90s were the last time Canadians showed similar levels of exuberance for real estate.
Canadian Household Mortgage Debt Service Ratio
Canadian debt service ratio for mortgages, by quarter.
Source: Statistics Canada, Better Dwelling.
Distribution of Mortgage Debt Is Key
That number doesn’t sound like a lot, but understanding distribution is key. The 6.89% mortgage DSR is split across all households, but that’s not the case. Census 2016 shows only 41.2% of households have mortgages. Older households also tend to have higher incomes, as well as significant equity in their homes. Younger households are bearing the brunt of the record DSR levels.
The Bank of Canada (BoC) warned about the debt concentration just last month. They estimate 8% of households hold more than 20% of all household debt in the country. They further added that these households are “vulnerable” in the coming years, as rates continue to normalize. Since we’ve achieved record high mortgage DSRs at record low interest rates, expect fireworks to go off as rates normalize.
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