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Housing bubble (Marcelle Faucher)
Housing bubble (Marcelle Faucher)

ROB cover story, Oct. 30, 2009

Easy credit, soaring prices raise new housing fears Add to ...

Nick Burzese and his fiancée Di Pham recently realized the North American dream - they bought a house of their own.

And the couple's new home is not just anywhere. It's in Vancouver, one of the country's priciest markets. Having rented for years, the couple, who both work in the mortgage business, thought they'd never be able to afford a house in the city. They were doomed, they felt, to live in a distant suburb. As they house-hunted, they saw to their disappointment that the recession hadn't dampened the market much.

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"Everywhere we went, there were so many people there," says Mr. Burzese, 36, a broker at MPRO Mortgage Architects.

Eventually, they came across an old 11/2-storey "character" home on a leafy street of detached houses near the Pacific National Exhibition grounds, on the city's east side. "We immediately fell in love with it," Mr. Burzese says. "It's really an area that's starting to transform."

Ms. Pham, 28, and Mr. Burzese put $57,000 down on the $570,000 house early this year. The couple says they're comfortable with the debt. They make good money and are installing a basement apartment as a "mortgage helper." But they might not have been able to get into the market were it not for the intervention of the Bank of Canada and the federal government - in the form of a continued low interest rates and federal policies aimed at maintaining the flow of lending and spending.

The interest rate on the their mortgage? Just 1.5 per cent.

By taking advantage of ultracheap interest rates to buy something they couldn't previously afford, the couple are doing exactly what the government wants Canadians to do to restore growth to the economy. Mr. Burzese and Ms. Pham may well be able to handle the new debt. But mounting consumer debt loads across the country are worrying some economists -- and even the bankers who are profiting from it.

Canadians are in the midst of a mortgage binge, taking out home loans at a pace that's nearly 8 per cent faster than a year ago. The point of a record-low borrowing rate and new fiscal incentives, such as allowing first-time home buyers to use a bigger chunk of their registered retirement savings plans as down payments, was to stir the animal spirits of consumers spooked by the financial crisis. But now, as the recession eases, officials in Ottawa and the analysts who advise large institutional investors on where to put their money are suddenly paying closer attention to the effect of all this stimulus on the longer-term prospects of Canadian consumers.

The concern is that people are taking on too much debt on the assumption that interest rates will stay low for a very long time, making Canadian consumers far more sensitive to the effects of housing and other asset-price bubbles. There is a growing consensus among leading economists and policy makers that the financial crisis might have been less severe had they not bought into former Federal Reserve Board chairman Alan Greenspan's assertions that nothing can be done about bubbles.

In Canada, economists are worried about consumers' willingness to pile on debt so soon after an economic catastrophe that was triggered by Americans' willingness to do the very same thing. "We know that cheap money in the past caused some problems. This is a time to be prudent," says Benjamin Tal, an economist at Canadian Imperial Bank of Commerce in Toronto.

"Right now, the rates being what they are, people just say, 'I want that house,'" says Darin Bauer, a Toronto broker with Mortgage Intelligence Inc.

That attitude is lifting house prices faster than many economists expected, given the severity of the recession. Higher prices are creating wealth for the sellers, loosening the recession's grip on the economy and helping to explain why the Bank of Canada estimates that Canada's first recession since 1992 ended in the third quarter. In the fight against the worst global economic downturn since the Second World War, policy makers have effectively drafted Canadians en masse. It's working, but at a price.

Middle-age mortgagors

Canadian consumer debt loads were already heading in a worrisome direction before the crisis. The trend is now accelerating, driven by a large increase in mortgage balances among middle-aged people.

U.S. consumers, chastened by the destruction wrought by their profligacy, have lifted their savings rates to levels above 3 per cent, up from zero ahead of the crisis.

Canadians are going in the other direction. Household debt rose 3.4 per cent in the first half of the year, as personal disposable income fell 0.2 per cent, according to Mr. Tal. The debt-to-income ratio has risen to 140 per cent from 131 per cent in the past year.

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