Prof. Andrew of Queen’s said that for many years the generally accepted idea was that housing costs should eat up about one-third of household income. The RBC figures show that the reality today is far different. A range of 40 to 45 per cent is likely a sustainable number over the longer term, Prof. Andrew said, although even at that level “it means that people are not going to have the disposable income to spend on other things, and that is not good for the economy. You want people to be able to spend on cars and trips and those kind of things, without necessarily borrowing against the value of their homes.”
He also noted that people’s attitudes have shifted significantly, and Canadians are far more willing to accept the fact that they will be “house poor” over the long term. Indeed, that appears to have been the motivation for federal Finance Minister Jim Flaherty to tighten up mortgage lending rules this summer, to try to reduce levels of debt associated with home ownership.
The danger in debt
Canadians weren’t always so willing to pile on debt.
Brian and Dency Sharkey became homeowners when they were in their twenties in the mid-1960s, but they were very cautious in buying a house that from today’s perspective looks unbelievably affordable.
The couple paid $19,500 for their bungalow in the Ottawa suburb of Nepean, and their monthly mortgage payments amounted to $99. In fact, that was even less than the $115 they had been paying to rent a two-bedroom apartment.
Still, even with two teachers’ salaries adding up to about $6,000 a year, it was hard to meet the payments, Mr. Sharkey said. It was done through scrimping, not through further borrowing. “My wife keeps reminding me about drinking powdered milk and that kind of stuff,” he said.
Things are different in 2012, and with so many people willing to take on large mortgages and burdensome monthly payments, the big risk is a spike in mortgage rates, or even a moderate rise. A significant number of mortgage loan defaults among homeowners could have a devastating effect on the economy.
Essentially, low interest rates are magnifying the already considerable risks that first-time home-buyers are taking on when buying expensive properties, said Ben Rabidoux, an analyst with research firm M. Hanson Advisors.
“Having young Canadians jump into home ownership, with mortgages that are at income multiples we’ve never seen before, is exposing a broad section of the population to significant risk if we run into any sort of a recession or macro shock or interest-rate rise,” he said. “We are just staggeringly comfortable with debt here in Canada right now.”
Exacerbating this issue, Mr. Rabidoux said, is that many young Canadians already have significant debts even before they take on a mortgage. They may owe money on credit cards, and many will still have student debts outstanding when they buy a house. “Twenty or 30 years ago that was not the case.”
With house prices now softening slightly in some markets, it is possible affordability will improve over the next few months, Mr. Rabidoux said. That would be healthy in the long term, and may eventually bring in new buyers who have been priced out of the market. But in the short term, our economy is so tied to the housing boom, and the construction jobs it generates, that a weakening housing market is “backing policy-makers into a corner,” he said. Politicians would like to see house prices decline to make them more affordable, yet they worry that any decline in home-building could dent an already weak economy.
With files from Claire Neary
The payment pinch
A look at how mortgage payments could change if rates go up:
$1,656.36: Monthly payments for a 25-year mortgage at a 3-per-cent rate
$480: The increase in monthly payments at 5.5 per cent
$795: The increase in monthly payments at 7 per cent.
$2,366.23: Monthly payments for a 25-year mortgage at a 3-per-cent rate.
$686: The increase in monthly payments at 5.5 per cent.
$1,136: The increase in monthly payments at 7 per cent.