Canadians have record-high mortgage debt. What happens when rates rise?
New mortgage debt surged by the biggest amount on record in the spring of 2021. But with prices continuing to defy expectations, policy-makers and economists are left wondering: Where does it end?
New numbers from Equifax this week confirmed what housing market watchers have known for a while now: Canadians are addicted to mortgage debt.
Canadians took out 410,000 home loans in the second quarter. That’s the biggest quarterly jump on record, up 60 per cent compared with the same period a year earlier.
Despite fears in the early days of the pandemic that COVID-19 could be a bucket of ice on Canada’s housing market, the opposite happened. Interest rates slashed to record lows, coupled with millions of Canadians cooped up at home suddenly needing more living space, acted more like gasoline on the housing market than water.
The average price of a Canadian resale home topped $716,000 in March. While average prices have come down a little since then, they’re still well ahead of where they were before the pandemic.
Prices that go up forever may make homeowners sleep soundly in their heavily leveraged bedrooms, but many of those paper gains are built on a foundation of debt.
There aren’t just more mortgages than ever out there — they’re also bigger than ever, too. The average new home loan was for $355,000 during the quarter, Equifax says. That’s also the highest level on record, and an increase of 20 per cent compared with where we were a year ago.
All in all, Canadians now owe more than $2.15 trillion in consumer debt, more than the value of Canada’s entire economy.
Rebecca Oakes with Equifax told CBC News that this surge of new home loans could become a problem if and when rates rise.
“A small movement in interest rates can actually do quite a large increase in what a consumer needs to [come up with] in terms of those payments,” she said. “That’s kind of why we’re a little bit concerned.”
The rent vs. buy conundrum
Adam Eljerbi owns a number of homes in London, Ont., half of which he bought in the past year alone. In an interview, he said he thinks buyers in some markets may be getting in over their heads because of a need to “keep up with the Joneses,” as he put it.
“There’s a lot of speculative behaviour,” he said. “There’s a lot of, hey, homes only go up in value.”
Eljerbi has roughly $2 million in mortgage debt to his name on his properties, but he isn’t particularly worried about rising rates — or falling prices, for that matter — because he doesn’t live in any them, or depend on them going up in value.
He’s a landlord, and makes his money fixing up homes in disrepair and renting them to reliable tenants: students.
He lives frugally, in his parents’ home in Barrie, Ont., about 250 kilometres from his stable of income properties. Despite never having taken in a six-figure income from his job in the tech sector, he’s amassed a real estate empire worth about $4.5 million.
Even before he lived with his parents, he rented a basement apartment in Toronto while working in finance on Bay Street.
“I was very frugal. I’d pack my lunches. I’m very, very cautious [with] the money that I spend,” he said.
WATCH | Why Canadians need to get over their aversion to renting:
Real estate investor Adam Eljerbi says more people should consider renting their primary residence, since prices in many markets simply don’t add up as an investment. 0:30
Even before the current run-up in prices, buying in Toronto never made sense to Eljerbi, but he’s comfortable with debt on his properties in more affordable markets because the numbers work: buy a fixer-upper, improve the housing stock, find reliable tenants, repeat.
“I’m a big proponent of renting where you live and owning what you can rent,” he said.
Eljerbi knows his way of life isn’t for everyone, but he wishes more people would break free of the cycle of borrowing more and more for something that will make them very little money if all they do is live in it.
“When you look at real estate in general and you look at mortgage debt, a lot of Canadians have taken on a substantial amount of debt and aren’t aware of the fact that most of … it is variable,” he said. “Once they start creeping up those interest rates, even if it’s a fraction, it starts to weigh on your cash flow.”
In over their heads?
But not everyone thinks Canada has a mortgage debt problem. Sherry Cooper, chief economist with Dominion Lending Centres, thinks the alarmism over growing mortgage debt gives a warped view of reality.
Delinquency rates are near all-time lows, she notes, which suggests the vast majority of people haven’t gotten in over their heads. She also notes that nearly half of all Canadian homeowners don’t have a mortgage on their homes, and recent changes to the stress test rules, which make it harder to qualify for a home loan, have raised the safety bar for everyone else who’s managed to buy in.
“Most Canadians are forced to qualify under even more stringent stress testing than before, substantially above their actual mortgage rate,” Cooper said. “Even if rates were to rise 2.5 percentage points, they are qualified to pay them at that level.”
Cooper says on the whole, she’s not too worried about new buyers who are contributing to that eye-popping $2 trillion debt figure, because they’ve proven their finances are more than healthy enough to withstand it.
She said the pandemic has been an “extraordinary period” for Canada’s economy, and “the proportion of the population that has been able to qualify for loans, those are the people that still have jobs.”
“It’s not the people that are living on government employee compensation,” she said. “So I don’t see this as a problem going forward.”