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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But Boomers had to travel uphill both ways to pay their mortgage debt, so there’s that.
Correct, this is an absolutely worse scenario than in the early 1990s. Young people are being bamboozled into rushing into the market, because 20% of households need to prop up their consumer spending, fueled by refinancing.
There has never been a shortage of housing in Canada, there is often too many people that pursue ownership at the same time.
When it’s the right time to sell, it’s the wrong time to buy. When it’s the wrong time to sell, it’s the right time to buy. People that are not used to trading large assets for a living always make the mistake of thinking it’s the last chance to buy, when it’s the perfect time to sell. That never has, and won’t be the case.
You might miss out on a few points not rushing in, but I’d rather miss a few points and protect the principal, than rush in and lose a shit ton.
RE is a beast and history has shown us how easily very rich/smart/successful people lose EVERYTHING. It is a massive asset class that is controlled by the people and when the priorities shift, as they have, from household to investment we end up gobbling up debt, making bad decisions and then wondering what happened a few years later. Tick tock.
Vulnerable in the coming years? Try the next 6-18 months. Those who hold on to 2017 valuations will kick themselves for not selling earlier; unfortunately it will be 2027 before 2017 comes back, if we’re lucky. Try telling that to someone 60+ who was hoping to retire in 5-10 years with their house shouldering most of the burden. FOMO on the way down is probably going to be a lot worse than on the way up ..tick tock.
Let me play the devil’s advocate here: “Toronto is a world class city that will rebound in no time. Immigration and unstoppable demand for housing will kick-start the housing market shortly; you’re going to miss out!”
The government is largely responsible for the mess we’re in, for not acting when they were meant to on housing. Now, it’s too little too late. Make no mistake, majority will feel the pain, whether or not you were one of the exorbitant players in the market.
lol…I see what you did there ;0)
My only comment, which helps support my view that a major political/societal shift will occur, is that the BoC sets rates and independent offices within the government recommend changes and move changes forward like the OSFI. Some of the offices are staffed with decades old employees who may have been hired during a different government and have different affiliations; it isn’t like a government comes in an guts everything and restaffs, unless you’re trump and now they have a government that doesn’t work because most positions haven’t bee filled! If someone like yourself, whom I assume is pretty savvy, views ‘the government’ as the problem 99.9% of the populous will as well. This downturn will destroy both economic and societal beliefs. Tick tock. BD4L.
This is just my opinion, so take it for what it’s worth. Toronto has a lot of work to do in terms of upgrading the quality of housing that is available to buyers (and renters) in order to rely on its “world class status” to survive a RE crash. I don’t mean to knock Toronto but it just isn’t there yet. I’ve viewed over 1000 homes in the city over the last 2 months and I’m seeing run down home after run down home and poorly maintained rental properties that are just bleeding capital because the landlords can’t see the bigger picture/importance of caring for the home. People will not want to come to Toronto to pay $1 million for a tiny house that needs 200 grand in upgrades while foreclosures are skyrocketing all around. Toronto is not NYC or SF -both of which have better quality homes available and largely well maintained rentals.
I see the same thing Jon and I completely agree. There are swaths of properties that haven’t seen any even basic maintenance/improvements done let alone basic modernization (I’m not talk house of the future but if you still have shitty blue carpeting all over the place, light brown/orange kitchn cabinets, flower wallpaper and parquet flooring…ummmm). I hate to say it but I’d guess 50% of the market is shit basically 90s relics, 25% good but needs more $15% are good enough and $ can wait with only 10% truly move-in-ready, contemporary and worth a higher price tag. I think that’s why new construction boomed so hard and at heights I never thought we’d reach (East Gwillembury @ $1.2 for 2200 sqft 4br/4bth…ummm) But that was the problem: When everyone was flush and it was easy to overpay for a junker and put in a couple hundred grand, no one stopped to ask whether this is fucked and what is going on. Personally that was my come to jesus moment last year; what is going on, this is crazy, find out more info now…that was 8+ months ago. BD4L.
I had been back and forth on what to do, but this was the final straw for me
https://www.google.ca/amp/s/www.theglobeandmail.com/amp/real-estate/toronto/a-million-dollars-now-buys-a-tear-down-in-torontos-greektown/article33957589/
Could you comment on the reason(s) for the seasonality?
That actually puzzles me too.
I think when they calculate statistics for the quarter they are using only mortgages issued during the same quarter but not all mortgages combined up to that quarter. That could explain seasonal volatility.
Could be wrong here, but that’s my guess.
Perhaps you are looking at this from the wrong side of the DSR.
Mortgage debt could remain stable, but as incomes and employment vary seasonally, the DSR would also oscillate.
Looks like there is a high probability of Doug Ford & Ontario PCs winning the Ontario election. What effects do you think their proposed policy of repealing the foreign buyers’ tax and likely having Pro Homebuilder policies will have?
I think foreign buyers did have a direct impact on the market. Huge capital outflows from china in 2015-2016 correlated with a bigger spike in many global markets. However I think the indirect impact was much more severe. The indirect impact being that local speculators/ buyers now justify prices and gains on the belief that there will always be a rich foreigner who will come along and pay a higher price.
Removing the tax could result in some foreign buyers coming back into the market, and some local buyers and speculators jumping back in believing that the market will shoot back up, however I think B-20 and higher rates have taken enough borrowing capacity away from the later group for any spike to be material.
I also do not believe the narrative that all the buyers coming from china are doing so to get money out of their home country so that they can flee to greener pastures if the need arises. I believe a lot of them are chasing yields like any investor would. A falling market along with a falling currency that you would need to cash out into first, acts as a double wammy to your wealth.
Winter is coming. On your first point, Dougie’s base hate ‘them foreigners’ and views them as the reason for the bubble so he can’t touch it. Imagine a PC leader in Coburg championing ‘chinese money’ flooding the market again…lol, sure and then Robbie will come back from the dead. Neither scenario is likely but I’d put my money on the latter. On your second point, Homebuilders are very savvy, they need downturns so they can re-up so to speak;even if the PCs opened up all of the greenbelt nothing will happen for 20 years anyway. Why overpay a farmer now when they can wait 2 years and scoop up the land at a 50% discount? What people don’t understand is that there is more than enough land; once you understand scarcity is a fugazi reducing land prices only benefit builders and the rich who buy land.
I highly doubt we’ll see it back even if Ford wins majority.
It’s going to be similar to his “Greenbelt” position when he said restrictions should be removed but then some smart dudes convinced him that it’s a bad idea.
Same will happen here. If he wins majority BoC and OFCI will come to him and tell: “Dude, we are trying hard here to cool down the market and you are acting in opposite direction screwing our efforts”. Also Poloz will additionally explain to him how excessive indebtedness will cause the next recession and how Ford may be partially blamed for that.
We’ll see, that’s just my speculation, I could be wrong here. For now I won’t waste my time on thinking about it until I see speculation tax repealed for sure.
This comment sounds inflationary. What would need to happen in the economy for this prediction to happen?
…Canadians owed almost $1.73 for every dollar of disposable income.
However, Poloz said he is confident that the financial burden will become more bearable with time.
“Our belief is that [debt accumulation] is just an unusual cycle and that we’re converging back to a normal economic performance, and that will give us a period during which those debts will – relatively, to the size of the economy – recede in importance,” he said.
https://www.bnnbloomberg.ca/mother-nature-driving-vancouver-toronto-housing-poloz-1.1087254
You should take comments from central bankers with a grain of salt. Their job is to support financial stability which means sometimes they have to lie in order to calm down the markets.
We have 3 ways out of debt:
1) Income growth will spike significantly (we need a very strong economy for that)
2) Fundamentals will catch up and debt levels become manageable aka “Soft Landing”. (10+ years of flat prices and investors keep all the units required for that)
3) Debts will be written off due to defaults.
Option 2 sounds like the most popular option everyone would support and that’s what BoC is doing now or at least want us to think they are doing.
I’m pretty sure they know it’s not going to work, but what other option should they promote?
Aka time correction rather than price correction.
In my opinion we will have 20% price correction and 30%time correction ( ie next 6 year price will not move at all)
Imagine now that you are a RE investor if you are not one already. What would be your plan in that scenario? Will you keep your investment at 0% profit or even loss for 6 years?
And we have a lot of investors in Canada currently. About every 1/8th has investment property.
I am turning around the idea in my mind that we’ve already had an income growth spike in a round about way through hyper-inflation of land. Just the income raises have gone to those already in the market at the expense of the future income of the newbies to the market.
As usual, for an analyst you miss the obvious.
DSRs have as much to do with income as they do with mortgage debt.
The consistent decline post-1992 to 2002 was not due to decreasing mortgage debt, but to increasing wages. This was the salvation of buyers during this period. When they bought, they were in up to their ears, but as time progressed, their income went up appreciably to make the debt manageable.
Since 2007, incomes have not risen, so the debt is not eased by rising income. THAT is the difference between what is happening in this decade from 2007, and any other time period.
It’s not high debt loads that are the problem, it is the lack of income escalation that keeps these debt levels critical. People go into debt like it was the 90’s – expecting higher incomes to get them out of trouble.
That is not the case today, yet consumers have not adjusted to the new reality.
China, on the other hand, has rapidly increasing salaries. Exactly the opposite. So debt loads in China, over the long haul, look like our debt load from 1992 to 2002 – steadily declining as a ratio of debt to service.
“The consistent decline post-1992 to 2002 was not due to decreasing mortgage debt, but to increasing wages.”
Huh?! I think you missed the obvious that the falling DSR in that period was because of both interest rates and price of housing (i.e. debt levels) falling.
That makes the subsequent increase in the DSR from 2002-2003 that much more scary because interest rates were still falling and income levels were still increasing but the sheer accumulation of debt (compliment of increases to house prices) has been of such a magnitude that the DSR has still been going up!
The result, with disposable incomes nearly 3 times what they were in 1992 and BOC rate at nearly 1/10th of what it was in 1992, it’s costing Canadians the same portion of their income to service their debt!!! I’d let that one sink in a bit.