If you bought a house during COVID-19 pandemicchances are you took on more debt than those who bought it shortly before the global crisis.
The total number of mortgage purchases skyrocketed in 2020 as home buyers began to buy at low interest rates.
Many of these new homeowners now owe much more than they earn – a problem that home buyers were less likely to face before the pandemic, according to a recent study by the Canadian Mortgage and Housing Corporation.
A sharp increase in housing debt, which now amounts to nearly $ 2 trillion nationwide, has raised concerns among economists, as well as the Bank of Canada, that some Canadian home buyers are cheating and subjecting themselves to a correction in the real estate market.
Philip Cross, a senior economist at the MacDonald-Laurier Institute, warned on Wednesday that a “substantial correction” in the housing market was imminent.
“Either home prices become completely unaffordable for the average person – we are probably already close to that point – or interest rates go up and this makes the whole thing unaffordable,” he told Star.
“These prices are simply unacceptable.”
Last week, Ottawa reported the fastest monthly growth in home loans on record as Canadians took out nearly $ 18 billion in new mortgage loans.
A CMHC study shows that despite the pandemic, total mortgage transactions increased by four percent in 2020, an increase of 10,628 from 2019. Home buyers were more likely to increase their loans to catch up with rapidly rising property prices, while most of them increased their down payments to continue to meet the 20 percent down payment threshold.
During 2020, the average mortgage loan size increased 20 percent in Hamilton, 16 percent in Ottawa-Gatineau, and 14 percent in Toronto.
The study notes that the vast majority of newly issued mortgage loans belong to borrowers with very good credit ratings, which reduces the risk of default on payments. The share of new mortgage holders with a credit rating of 700 or more has grown steadily since the start of the pandemic.
However, the report concludes that rising mortgage debt levels increase households’ exposure to market disruptions.
“The accumulation of mortgage loans within a concentrated group of borrowers may continue to increase the vulnerability of the housing finance system to disruptions,” it said.
Cross says new homeowners could lose significant fortunes if – or “when,” he says, – property prices fall.
“People will have all kinds of liabilities and much fewer assets. This will not benefit people’s net worth and will discourage consumer spending, ”he said. “It’s hard to see a happy ending for it all.”
The Bank of Canada has repeatedly warned of rising household debt, using signs of consumer congestion to justify new rules that make it difficult for new home buyers to get home loans. But the value of real estate has hardly declined: housing prices in remote rural areas have risen by 50%.
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Tiff Maclem, the bank’s governor, recently warned that interest rates won’t always be at historic lows, a sign that recent home buyers may have higher debt burdens in the future. The bank has already indicated that rates are likely to rise next year when inflation eases. If inflation continues its rapid growth – growth of 3.6% in May – experts warn that the bank may have to raise interest rates earlier.
“A major adjustment could be damaging,” said Pedro Antunes, chief economist at the Conference Board of Canada. “This will undermine household confidence, negatively impact welfare and hit consumer spending.”