Rising Home Prices Pose Biggest Economic Threat

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Rapidly rising home prices have been a volatile issue in Canada for years, as shelter costs far outpace average incomes in some the nation’s largest cities. And the risks posed by the accompanying mortgage debt grew even more pressing in 2016, according to two reports out this week from the Bank of Canada and ratings agency DBRS.

According to data revealed by both institutions, Canadians are grappling with more high-risk debt than ever as a direct result of the housing market; the cost to buy a home is now six times that of the average household income in Canada – the highest ever, reports the BoC’s Financial Systems Review.

As of Q3 this year, there were 18% more households with very large debt loads (a mortgage-to-income ratio above 450%) – up 13% from two years ago. And it should come as no surprise that the largest proportions of this debt are carried by buyers in Canada’s most competitive housing markets – 39% in Vancouver and 49.7% in Toronto.

Meanwhile, the report from DBSR finds a drastically larger portion of household incomes are needed to pay down mortgages in these cities: 95% in the Greater Vancouver Area and 66% in the GTA, respectively. That’s far higher than the amount of 39% recommended by the Canada Mortgage and Housing Corporation. To put it into perspective, excluding those two cities, the national Gross Debt Service Ratio for the rest of the country is within the safe range, at 38%.

New Mortgage Rules Expected to Help

While the debt numbers look daunting, both institutions are optimistic that measures put in place by both municipal and the federal government will help reign in risk. “Several macro-prudential policies have been implemented this year, addressing high real estate prices and taxpayer exposure to the housing market,” states the DBSR. The BoC concurs, finding new mortgage rules introduced this year should help counter run-away household debt levels.

Buyers and borrowers endured a number of changes introduced this year, designed to toughen mortgage qualification standards, reduce risky borrowing, as well as discourage foreign real estate speculation:

A 15% tax on home purchases for foreign buyers of Metro Vancouver real estate
A mortgage stress test on all high-ratio fixed mortgage applicants
New restrictions for lenders who rely on insuring and selling bulk mortgages for funding
No capital gains exemption for foreign buyers selling Canadian homes
Requiring all home sellers to report the sale of their principal residence to the CRA

“Accordingly, these policies will help mitigate financial stability risks over time,” stated BoC Governor Stephen Poloz, who added that while the likelihood of a financial shock is low, it would have severe consequences should it actually occur.

It’s Not All Bad News

According to DBSR, there is a silver lining to rapidly growing housing prices – those already ensconced in the market have seen great equity gains, which could even act as a buffer in the case of an economic downturn. Rising property appreciations Is helping boost overall household net worth – up $843% to an average of 726,000 – and resulting in an average of 74% equity in Canadians homes. That means these households wouldn’t be dramatically impacted by a 20 – 40% market crash, states DBSR, as these equity rations would only decrease 67.5% or 56.7% respectively in those scenarios.

Are you concerned about rising housing prices? Share your thoughts in the comments!