Canadians who were aged 35 to 44 in 2012 have racked up more debt, relative to their net worth, than their peers did in the past.
That’s one of the findings in a new Royal Bank of Canada report about rising leverage, which dug through Statistics Canada data from 1999 and 2012 (the years for which data on debt, broken down by age group, were available).
Not only is this particular age cohort more levered than people in that age range had been in 1999, it is more levered than any other age group is at the moment. And that makes this group more vulnerable to any economic shocks, especially in the housing market.
“Their debt load is more onerous than what we’ve seen in the past,” Paul Ferley, an economist at RBC, said in an interview. “It certainly highlights the greater risk for that age group.”
Home prices are the main reason that they’re so indebted.
“Real house prices increased by an average of 4.6 per cent per year from 1999 to 2012, which was well above the average 0.3-per-cent increase over the prior two decades,” Mr. Ferley wrote in the report. “This has resulted in higher leverage ratios for first-time home buyers. For existing home buyers (i.e. households who purchased their home prior to 1999), the price gains between 1999 to 2012 simply resulted in an increase in equity in real estate.”
Even though mortgage rates are lower than they were in 1999, those aged 35 to 44 in 2012 have been making larger average monthly mortgage payments than their peers had been back in 1999 because they’ve taken on larger mortgages. “As a rough approximation, the monthly mortgage payment on a 25-year mortgage at market rates and average mortgage debt outstanding has risen much more sharply for the 2012 cohort of 35-44-year-olds compared to their 1999 equivalents than for other age groups,” the report says.
But mortgages aren’t solely responsible for this group’s leverage.
“Excluding real estate, leverage still increased notably for this age cohort relative to other age groups when compared to their 1999 equivalents,” the report says. That’s largely due to lines of credit.
“We expect that housing markets will undergo a ‘soft landing’ as activity moderates to levels more in line with demographic fundamentals over the next couple of years while the economy is expected to grow modestly going forward, lowering the unemployment rate and allowing for a gradual rise, or ‘normalization,’ of interest rates to occur alongside rising household incomes,” the report said.
“With that said, the increased leverage associated with both mortgage and non-mortgage borrowing does imply the 35-44 age category is particularly vulnerable relative to the rest of the population were an unforeseen shock to occur.”