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The Real Estate Market Soaring household debt leaves Vancouver, Toronto homeowners vulnerable to higher rates, CMHC warns

Soaring levels of household debt in Vancouver and Toronto have increased their vulnerability to higher interest rates, according to Canada’s federal housing agency.

The ratio of debt to disposable income in both census metropolitan areas is over 200 per cent, while the national average is around 170 per cent. In Vancouver, the debt to disposable income ratio climbed three percentage points to 242 per cent over the second quarter of last year. In Toronto, it rose three percentage points to 208 per cent over the same period, Canada Mortgage and Housing Corp. (CMHC) data show.

“With interest rates on the rise, highly indebted households could see their increased required payments exceed their budgets,” CMHC said in a statement accompanying the second-quarter numbers. “Highly indebted households have usually few debt consolidation options to respond to increasing debt service costs.”

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Even though mortgage delinquency rates have been declining, the housing agency said a rising interest rate environment heightens the risk for debt-laden homeowners.

“It is a vulnerability that has to be closely watched should interest rates continue to move higher,” said Brent Weimer, CMHC’s senior housing researcher.

Since the summer of 2017, the Bank of Canada has been steadily raising the benchmark interest rate from 0.5 per cent to 1.75 per cent. It is expected to hike the level again next year.

Before rates started to rise, homeowners enjoyed ultracheap money for almost a decade as the central bank kept interest rates at 1 per cent or lower in order to stimulate the economy after the Great Recession.

The low rates combined with a lack of housing in Vancouver and Toronto fuelled buyers to take on lots of debt to buy a home.

Now, mortgages represent about 70 per cent of the total household debt in those two cities. Meanwhile, across the country, mortgages make up about two-thirds of total household debt. (That includes credit card debts, auto loans and lines of credit.)

Even though mortgage debt has increased, CMHC said the share of household income needed to service the debt has not varied dramatically over the last several years.

Since the majority of homeowners have fixed-rate mortgages, many households have not had to deal with the full impact of the higher interest rates.

A recent Environics Analytics study found that the average Vancouver household spent an extra $1,152 in interest charges last year, and the average Toronto household paid an extra $932 in interest expenses. In comparison, the average Canadian household incurred an additional $544 in interest payments last year.

“The increased debt payment burden may come at the cost of reduced consumption, decreased savings or opting to make lower repayments on the principal,” CMHC said.

CMHC considers the debt-to-income ratio a measure of the relative vulnerability of indebted households.

The only other census metropolitan area that was substantially above the national average was Victoria with a ratio of debt to income at 189 per cent.

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