Here’s Why Parliament Doesn’t Care About High Canadian Real Estate Prices

Here’s Why Parliament Doesn’t Care About High Canadian Real Estate Prices

Canadian real estate prices have made a rapid rise, sending debt levels soaring. Despite the acceleration of household debt, the federal government has done nothing. Sure, we’re spending a few billion here and there, to study the issue. However, many people are wondering why there’s been no sense of urgency from Canada’s Parliament. That’s because in Ottawa, the issue doesn’t look all that concerning. Data from the Parliament of Canada shows that while debt levels are at all time highs, the debt service ratio isn’t. These data points don’t present the hair on fire issue that millennials feel exists in Toronto and Vancouver.

Household Debt Service Ratio

The household debt service ratio (DSR) is the ratio of income that goes towards servicing debt. That’s a bunch of fancy words to say the ratio of income that people use to pay for stuff they already bought, but still need to pay off. The more debt (especially housing) people buy, the higher this ratio goes. It becomes a concern to the government when this gets too high, because it gets hard for people to consume. Less consumption means a slower economy, and that’s not good for anyone. The federal government becomes concerned when this ratio reaches too high. Otherwise they just pretend to be concerned, to the extent required to win votes.

Source: Parliamentary Budget Officer.

Debt Service Ratio Is Only 1% Higher Than Average

The debt service ratio is substantially lower than peak, and only slightly higher than average. The DSR rose to 14.17% in 2017 Q1, meaning 14.17% of income across the country went towards servicing debt. That’s a 5.15% decrease compared to the peak obtained in 2007 Q4. It’s also 1.06% higher than the 5 year average of 14.02%. While the debt-to-income ratio has climbed all the way up to 173.7%, the amount of income people devote to worshiping servicing debt hasn’t changed all that much. It’s also definitely not close to peak.

Source: Parliamentary Budget Officer, Better Dwelling.

Interest Only Debt Service Ratio Is Over 7% Lower Than Average

How did the debt-to-income ratio rise, but the amount people are paying stay relatively flat? Record low interest rates. In 2017 Q1 households used 6.09% of their income to service interest payments. This is 7.86% lower than the 5 year average, and way lower than historic levels. The first quarter of 2017 was actually the lowest levels in history for the interest only debt service ratio. To put that in other words, Canadians have never spent less to borrow more money.

Source: Parliamentary Budget Officer, Better Dwelling.

On Paper, There’s No Problem

From the government’s view, there’s no problem because debt service ratios are the same more or less. Debt levels are rising in households, but people aren’t spending more than they historically have to borrow it. The benefit of higher home equity however, is a huge win for them. It can be withdrawn by homeowners to mitigate the fact that half of Canadians don’t have anything saved for retirement, taxes associated with high home values help to pay off debt, and homeowners are the bulk of the voting population. Immediately speaking, they have more to lose than gain from  meddling in housing issues.

That isn’t to say they there are no risks. The extended low interest rate environment means that any success to the economy will translate into significantly higher debt service ratios. Having households feel poorer, while the economy is booming is a very strange reality Canadians will face in a best case scenario. That risk isn’t this administration’s problem however, it’s a problem for whoever is elected next.

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  • 2 Da Moon 6 years ago

    This is what people don’t understand, payments are the point. It costs the same to pay off way more debt today, than it did 20 years ago. People are still paying the same ratio of income, but millennials that do terrible financial planning are complaining that it was easier back then. It was not, you just suck at saving and investing.

    • Ham 6 years ago

      Because boomers are so good at financial planning that half of them are facing retirement with no savings? And please don’t tell me that their houses are for retirement funds – how clever is putting all their eggs in one basket?

    • Norbert Schumacher 6 years ago

      So, you agree that millenials need to accumulate more debt to achieve the same thing as the boomers? And to do this, they need to save up larger down payments?

      You missed the graphs showing the DSR going up since 20 years ago

    • Ham 6 years ago

      Also, keep in mind that millennials are not entirely represented in the numbers above because a lot of them are mortgage free because they currently can’t afford to enter the market due to inflated prices. If they were to buy houses like boomers did back in the days you would definitely see DSR shoot up with them being younger work force with lower wages than established boomers (latter if which hold the most debt represented in this data).

      • bluetheimpala 6 years ago

        Good observation. I think of employment numbers; a decrease is always viewed as good news but can mean people have given up looking (unemployment means your are ACTIVELY looking for work). Just because a ratio/% is the same as previous levels doesn’t mean we’re in a better position it just means the reality is hidden. Governments have to look at everything from a macro level and what ‘triggers’ they inherited. It is easy for a current government to feign ignorance when everything implodes and turn to the ‘model’ that the previous governments have used.

        The question is: Is this the new model or is it inherently broken?

    • MH 6 years ago

      “Borrowed money is the most common way that smart guys go broke” – Warren Buffett

    • Dennis 6 years ago

      You are over-complicating this.
      Debt is fixed and interest rates are variable.
      There has been little change in DSR as increased debt has been offset by lower rates. Now as rates rise the DSR will increase.
      Over the past 3 years you could borrow 1 Million for $20,000 a year, so everyone did. Now it’s $30,000 a year ans soon it will be $35,000 a year.
      The extra $15,000 is an extra $25,000 before taxes.
      The shadow banking sector has also skewed the numbers.

  • Michael Z. 6 years ago

    “a few billion here and there, to study the issue”

    So you would rather them not study the issue? Everything is so simple when you’re young, but there’s real consequences to acting without understand the underlying root of the issue.

    • Not So Super Dave 6 years ago

      Governments should take swift action to ensure the safety of their population. They should deploy temporary resources to help those that need help, and study to make better long-term decisions. Studying that information today means we won’t have another solution until at least the next election. While we sit on our butts, 260 people in Vancouver alone are expected to go homeless just next year.

  • Berkowickz 6 years ago

    Trudeau is trying to make sure Canada continues to be sold to the Chinese. His government will come up with data to support selling out locals any day of the week. The reality is, people are suffering. You are absolutely correct that the government is doing the bare minimum to be re-elected. People are dying in the streets, and 5 people are going homeless every week in Vancouver. This is a goddam emergency. We don’t have time to measure how fat these homeless people are, which of the 27 genders they identify with, etc.

    • bluetheimpala 6 years ago

      Conservative/Right-wing PR troll or Russia troll…hmmmm?

      Berky, go home you’re drunk.

      Leave your partisan bullshit at the door.

      • Lessdenadalla 6 years ago

        Here we go .. a mainstream narrative that labels valid points as a right-wing trolling? Russia troll … really???!

  • Happy Boomer 6 years ago

    It’s disgusting that this country decided that being able to buy pot from the government is reason enough to sell out your future opportunity. Good news is you millennials will have access to heavily taxed pot. The bad news is you won’t be able to afford to retire, so you’ll need the pot to take off the edge of working until you’re

    • bluetheimpala 6 years ago

      Hi Boomer! I am clearly not (bong hit) understanding (cough, cough) what you’re…what, man I’m hungry. Let’s get shwifty in here biatchess…seriously though, if I see you here again I will have to go ‘full troll-tard’ on you. Maybe I’ll get distracted and forget. Maybe not. Regardless, I will come back here and then spend waaaaayyy too much time tracking your old comments and then INB4 every single day. Wife will leave me. Dog will get depression. End up eating easy mac (yuck!) because I have no time to whip up the real stuff (yum!)….I go postal, take out some people and then have a cult created in my name that will be responsible for bringing Satan back in an elaborate but no doubt awesome ceremony. see what you did. see.

      You are not welcome here. Please leave.

  • Kyle 6 years ago

    If you think prices are high now, just wait and see the mind boggling numbers in the years to come. This slow down is just a blip like any stock price retracting after a long bull run, then flip flopping and then going back up. The only thing that will really make prices crash will be when the economy crashes and people loose jobs and need to sell. Right now with all this supply out there, lots of them just looking to cash in. They are priced way to high and will not sell. Slowly they will start taking their properties off the market and then you will hear in the news supply is going down and FOMO will start creeping up and they cycle begins again. This is what will happen. You can draw all the graphs you on pull out all the data you want but you cannot predict the future the world is complicated it doesn’t work in a perfect mathematical way. The above is what I think will happen. Did any one see the condo boom coming? For the last 10 years condos were garbage investments and then suddenly out of nowhere from Sep 2016 they have been on fire even with the “bubble” bursting in April 2017. You can’t predict this stuff.

  • Kyle 6 years ago

    Go look at major US and world cities. San Francisco, New York, Seattle, London etc the prices of real estate make absolutely no sense. They are so high and unimaginable, makes Toronto look cheap even at peak prices in April 2017. And average incomes in those cities are not much higher than ours yet real estate prices are absolutely insane. Even rent prices. It’s a reall crises. We aren’t there yet and it won’t be a linear path to that but we will get there. Don’t be fooled by a short term pull back…

    • Ham 6 years ago

      Have you compared economic output of these cities to Toronto? It’s one thing to blindly say “major cities in the world are so expensive. Toronto is a major city. So it will become as expensive as these cities” and another to really compare how rich Toronto is compared to other cities. I’m sure you’ve been to these cities: Toronto is tiny compare to them.

      • I Heart Toronto 6 years ago

        Toronto is a great city, but you’re right it’s no where near San Francisco, New York, Seattle, and London. Each of those cities have GDPs close to the equivalent of our whole country. Toronto is a lot of Canada, but not all of it.

      • Tommy 6 years ago

        Relatively speaking, yes, the output of Toronto is comparable to the other cities mentioned. Toronto prices are much cheaper than those other major cities precisely because its output is much smaller. But it is Canada’s major city and center of tech and commerce, recognized on the global scale. So it will continue to go up in value – in relative terms – just like the other larger cities.

        • Ham 6 years ago

          I would appreciate your sources for your statement regarding economic output.

          On Toronto being the center of tech and commerce: Just by looking at number and income of tech jobs in these cities and comparing that to Toronto, we do not even get close to how affluent these world class cities are. Case in point: software engineer in Toronto can expect to make 80-90k CAD for moderate experience level. NYC, SF: 120k USD for the comparable experience level. Finance guys: would you rather work for Credit Suisse in NYC or CIBC in TO?

          The reality is that these cities you are comparing Toronto against has a lot more opportunities to offer. And when the one thing Toronto used to offer – relatively affordable realestate is gone, it makes things all the more easier to leave the city in pursuit of better income.

        • Ham 6 years ago

          Just did a quick research. 2014 gdp numbers.

          NYC: $1558.518 bn
          San Francisco: $411.969 bn
          Chicago: $612 bn
          London: $542 bn
          Toronto: $303 bn

          Looks like Toronto has a long way to go.

    • YYZSEA 6 years ago

      I actually think the other way around. I grew up in Toronto and then lived in Mountain View, CA and now settled in Seattle for over 10 years. Income here are generally much higher than in Toronto. And therefore the real estate is affordable for most people even with current prices. We work in IT. My wife and I together are making over 300k usd (~400K Cdn) a year in Seattle with income tax rate of ~28%. IT People in Bay area generally makes 25%-30% more than Seattle. Honestly we are only considered as middle class. A decent home in Seattle in good neighborhood is now around 1.2M usd ~ 1.56M cdn. I visited Toronto few month back, Comparable homes from Toronto to all the way up to Aurora are all generally more expensive than Seattle! I see big new development with hundred of homes building in Aurora (that’s suburb of 50+km north of Toronto) ; and they are all starting at 1.5M! How many millionaire been hiding in Canada these days?! We wanted to move back to Toronto for a while because I am home very sick. But the number just doesn’t make sense to move back. For the same line of work in Toronto, we can only get about 1/3 to 1/4 of what we can make in Seattle with much higher tax rate and much less houses.

  • Gregory 6 years ago

    Boomers have the luxury to give their children the down payment on their first property….Boomers have had so much money on the houses they bought in the 70s and 80s… they can afford to give their kids $200k for a down payment…the circle of life. Makes sense to me.

  • Justin Thyme 6 years ago

    Retroactive inflation.

    When interest rates DO go up, it will cost more to pay for the things you ALREADY bought.

    THAT is the danger of rising interest rates.

    The DSR (Interest included) is going to go up with every rise in the interest rates, even if no one borrows any more money.

    So even if the cost of goods FALLS (the forward inflation rate), as far as consumer spending goes, it will FEEL like high inflationary pressures. Pressure will be put on wages. The problem is, the manufacturers have already gotten their money for the products that are now costing more. No MEW money to pay higher wages.

    Methinks there is a PhD thesis in here somewhere – the study of retroactive inflation and its implications.

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