Toronto

Over 82% of Toronto’s Household Debt Is Tied To Residential Real Estate

Toronto real estate pushed to new highs, bringing the city’s debt level with it. Breaking down the Canada Mortgage and Housing Corporation (CMHC) numbers from yesterday, we can see where Toronto spends its cash. In Q2 2018, over 80% of Toronto Census Metropolitan Area (CMA) debt was tied directly to the value of real estate. The high level of debt, and attachment to real estate, makes Toronto the second most vulnerable in the country, when it comes to rising interest rates.

Debt to Income Ratios

The debt to income (DTI) is a measure of debt, and tells us a lot about households in a region. The DTI is the ratio of debt in contrast to the amount of disposable income households have. The higher the DTI, the more debt households have, relative to their income. The lower the ratio, the lower debt they have relative to their income. Ideally, you want to see this ratio taper, while the economy is booming. That is, unless you’re a central bank trying to stimulate the economy with cheap debt.

High DTIs might seem manageable, but there’s quite a few problems with it. When accumulated at low rates, these borrowers are certain to see servicing costs rise. Since their debt service ratio is already high, a rise in rates can push these households to their limits. Best case scenario, these households slow down consumption. The slowing of consumption, especially when tied to a region, can have a big impact on a local economy. Less consumption means lower GDP. A drop in GDP can mean a decline in employment, stalling wages, or even recession. Not a sexy best case scenario, is it? On that note, let’s break these numbers down.

Toronto Households Owe $2.08 For Every $1 They Earn

Toronto households owe a whole lot cash, even when slightly higher incomes are factored. The DTI ratio is 208.08% for Toronto CMA at the end of Q2 2018, up 10.2% over the past 3 years. To put it another way, Toronto households owe $2.08 for every $1 of disposable income they earn.

Canadian Debt To Income By City

The ratio of household debt to disposable income, in major Canadian cities.

Source: Equifax, Statistics Canada, Conference Board of Canada, CMHC calculations, Better Dwelling.

The increase is the largest in Canada, and places Toronto second amongst the most indebted cities in the country. To contrast, Canada is also impressively high, but still much lower, 171.31% – up just 3.5% over the past 3 years. Toronto’s debt increase is largely due to new real estate debt.

Over 82% of Toronto’s Household Debt Is Residential Real Estate

The vast majority of Toronto household debt is tied to real estate. Households in Toronto have a mortgage DTI ratio of 145.2%, and a HELOC DTI of 24.6%. That’s 169.8% tied directly to the value of their home. If you’re thinking “that doesn’t sound bad,” you haven’t considered the distribution of this debt.

Toronto CMA Debt To Income Breakdown

Toronto household debt to income ratio, broken down by type of debt.

Source: Equifax, Statistics Canada, Conference Board of Canada, CMHC calculations, Better Dwelling.

A lot of people in Toronto have no mortgage debt, and the majority have whittled away at their mortgage. Only 26% of Toronto CMA households have a mortgage right now. That means the other 74% are helping to averaging the mortgage numbers lower. Now consider 79% of mortgage holders have owned their home for longer than 5 years. Those that did, bought at much lower prices, and made significant dents in their debt pile. The other 21% of recent home buyers have much higher mortgage DTIs than the average home in Toronto. That means a fifth of mortgages holders are vulnerable to rate hikes, and the shock that occurs at the end of the business cycle.

Who gives a f**k about these highly indebted households? Well, they impact comps, financing rates, and ultimately the value of your home. If they’re forced to sell lower, the value of your home goes lower. If they default at a higher rate, they raise the costs for new buyer financing, reducing liquidity. Reduced liquidity means lower buyer competition for your home, when you decide to sell. Both of these problems ultimately turn into a homeowner’s liability, even if you aren’t one of these highly indebted households.

Debt is borrowing future income, for consumption today. Across Canada, households have pushed the economy forward on borrowed time. Toronto’s economy did exceptionally well compared to the rest of the country. However, it did so by borrowing even more future growth than the average city in Canada. That means the city has a larger debt to payback before resuming healthy growth.

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28 Comments

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  • Reply
    Max 7 months ago

    Excellent point missing from yesterday. These numbers are averaged down, in comparison to today’s buyers. Like the Bank of Canada said, there’s 8% of people in Canada with a DTI 450%, and hold over 20% of all debt. These people should be worried.

  • Reply
    DB 7 months ago

    I’m surprised to see the number of households with “no mortgages” so high…those are the ones who are the safest yes..but what do we know about them? are they over leveraged in other areas of debt that is not recorded here. I find it difficult to believe there are so many who have not taken advantage of high prices and low interest rates not to be in some sort of mortgage debt.. ie family cottage here or abroad or other RE deal linked to their primary residence. If I’m wrong then there are more conservative family house holds out there in TO than I am led to believe.

    • Reply
      Grizzly Gus 7 months ago

      Believe that 24% of households hold mortgage number includes those that are renting as well.

  • Reply
    SUMSKILLZ 7 months ago

    I’m surprised car debt is smaller, percentage wise, than credit cards. All I see around me is expensive fancy new cars. Often two in each driveway. I guess they all used HELOCs to acquire them? That in itself makes no sense to me when auto loan rates, relatively recently, were at 0 or close to 0% financing. I’m scratching my head looking at that debt percentage chart above. The only other guess from this neophyte is that leased vehicles don’t appear as debt?

    • Reply
      Brad 7 months ago

      You are semi-correct. Leased vehicles do count as debt, but *only* the amount of the lease, not the buyout cost, so those fancy 50-70k vehicles are counted around 20-30k debt and even less.

    • Reply
      Smaug 7 months ago

      A lot of that debt likely gets swallowed into mortgage debt at refinance time.

    • Reply
      M 7 months ago

      I was surprised to see that too. Interest only on most HELOCs would mean lower monthly payment at 5% than even 0-1% + principle you’d get at the dealership. Plus you’d also probably get a discount paying cash.

      • Reply
        El Nino 7 months ago

        I saved for two and a half years to buy a used car in cash. I called them up, negotiated the deal and told them that I’d be paying cash. Their response was “it doesn’t matter how you’re paying, the price is the price”. They wouldn’t budge since they don’t make any additional money (since they’re not charging you a premium for financing the car).

  • Reply
    DB 7 months ago

    Wait until stagnant or reduced home prices start to effect these late comers to the feasting table now that the food is almost gone.
    As some of you have stated in articles past, when the music stops we will see who isn’t sitting in a chair…or in other words who will it be left holding the bag ?

  • Reply
    Nick Dixon 7 months ago

    Fasten your seatbelt folks. We’re coming in for a soft landing.

  • Reply
    Bluetheimpala 7 months ago

    https://www.zolo.ca/brampton-real-estate/64-mistdale-crescent?utm_source=zolo&utm_medium=email&utm_campaign=new-listing…say what you will but this listing, 2 months ago, would be in the $900s, definitely in the mid $800K.. It isn’t 100% updated but looks like theu redid a few things like the floors. Jjust look around at the comparable properties in the $900-$1.1 range. I’m not calling anything at this point but I will be tracking this one. If it goes for 90-95% of list the brampton margin call is going to end up being a blood bath.

    • Reply
      Loyal follower 7 months ago

      If you look at the home history they are asking 310K over purchasing price in 2013 after dropping the original asking in June 2018 by 81k. The real question is: “How much equity is left in this house?”

    • Reply
      neo 7 months ago

      Blue,

      I have a better one for you. This one was bought last Sept 2017 for $1,325,000. Thought he got it for a good deal since it was listed that spring for $1,600,000. The flipper spent $100,000 on a backyard pool oasis and relisted for $1,500,000 this Summer.

      Ended up selling this week $1,155,000 after 5 months on the market. He lost $300,000 in one year. He didn’t even want to list for $1.5 million, he wanted to list for $1.6 million but the market turned on him and he ended up losing his shirt.

      Things are definitely turning.

      https://www.zolo.ca/milton-real-estate/810-miltonbrook-crescent

  • Reply
    CupaJoe 7 months ago

    Anyway to “Short” a city like say… Toronto or Vancouver?

    … asking for a friend…

    • Reply
      JJ 7 months ago

      All the research I’ve done on this suggests there isn’t really an easy play. I’ve heard suggestions of buying USD or shorting bank stocks.

      I’m not really sure on either, but I suspect buying USD would be a safer and easier play. Who knows how long it will take for the hit on earnings to show through on bank stocks, or what the gov will do to prop up the market. With USD, if the BoC slashes rates or keeps them low, you will likely profit, and if our one-cylinder FIRE economy stutters, you will likely profit. Question is what might happen to the US?

      Would like to hear other thoughts though.

  • Reply
    newbie 7 months ago

    I don’t get it, DTI of 169.8% in TO? With house prices ranging from $500 and up, does it mean the annual household income majority of people living in TO is close to $300k?

    • Reply
      El Nino 7 months ago

      The article accounts for the 74% who have paid off homes so the ratio is rather imbalanced. I personally purchased a home in Jan 2017 and have a pretty sizeable mortgage. I’m lucky I locked in for five years at the time since I’m hoping that the credit cycle will be past its final phase in four years for my renewal.

      My DTI is probably like 400%. So if you take a boomer and their paid off house and balance it with mine, it puts the ratio at 200%. Seeing that 3/4 of the people in Toronto have a “paid off home”, the ratio will of course be skewed to the 169% range.

      • Reply
        someguy 7 months ago

        I think the 74% from the article is the percentage of all households that are mortgage free (paid off home + renters), and not the percentage with paid off homes.

      • Reply
        Joseph 7 months ago

        El Nino, IMO, we’ll still be in gutter in 2022. I think we bottom out around 2024, then see gains start again in 2025.

        My advice would have been to lock in a slightly higher rate for 10 years back in 2017. That would have gotten you close to the clearing, or possibly, out of it.

        Whatever the case, my fingers are crossed it all turns out well for you in the end.

    • Reply
      Ian 7 months ago

      Third last paragraph is key to understanding why that’s considered high. You won’t get a direct answer, but I want to do some napkin math to get a feeling for this number. So this isn’t exact, but gives a decent understanding of what they’re saying. M

      Only 26% of Toronto CMA households have a mortgage right now.”

      That makes it more like 678% for the 25%, but lower because households with homes generally have higher income, so let’s assume those homes make twice the median salary, and cut it in half. So
      339% DTI.

      Now consider 79% of mortgage holders have owned their home for longer than 5 years. Those that did, bought at much lower prices, and made significant dents in their debt pile. The other 21% of recent home buyers have much higher mortgage DTIs than the average home in Toronto.

      Those that bought over the past 5 years would likely be above that 339% number, and those that didn’t would be below that. Since the majority are below, those in the past 5 years are going to be significantly above it.

  • Reply
    Bluetheimpala 7 months ago

    And another one…https://www.zolo.ca/brampton-real-estate/80-mullis-crescent?utm_source=zolo&utm_medium=email&utm_campaign=new-listing

    I haven’t looked into the sale history. I live and die by feeds. This house would’ve in the high $800K or even mid $900s 6 months ago.

    Won’t call it until I have more data which will take another 60 days but damn, B-town turned on a dime. Mississauga is showing some massive cracks at the moment. Tick tock BD4L.

    • Reply
      Lessdenadalla 7 months ago

      You should check Markham area detached market between 800K and 1.5M. Many price reductions in RH, Aurora and Newmarket with sales prices hovering around 2014-2015 levels.

      • Reply
        SUMSKILLZ 7 months ago

        Sale prices are even lower in newer Aurora. A house that would have easily got $900 000 in 2017 is now struggling to get $750 000. List prices are stubbornly high.

    • Reply
      Joseph 7 months ago

      Blue, I’ll be interested to see two things with this one:

      1. Whether or not it sells and, 2. If it sells, how quickly.

      The reason I mention that is because it’s only been posted for 1 day (IF this house wasn’t a repost at a lower price). It SHOULD NOT last through this weekend at this price. If it does, that’s a gigantic red flag. Houses at this price in Toronto (well, Brampton) never outlasted a weekend in the recent past.

      • Reply
        Beh G. 7 months ago

        Well, it was listed at $799k in September and stayed on the market for 78 days so it’s unlikely a $30k drop would have buyers lined-up.

        With some homes selling 10% below asking anyone interested in buying at $769k would have brought in an offer for that amount when it was listed for $799k.

        The Realosophy web site says in that neighborhood prices have gone up 67% since 2013 whereas this house is listed 79% above what it was purchased for in 2013 so possibly still overpriced.

    • Reply
      neo 7 months ago

      Blue,

      That house sold for $520,000 in 2016 so they are still in the black unless the bottom completely falls out.

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