Canadians have record high mortgage debt. What happens when rates go up?

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New Equifax data this week confirmed what home market watchers have long known: Canadians are addicted to mortgage debt.

In the second quarter, Canadians took out 410,000 home loans. This is the largest quarterly jump on record, up 60 percent from the same period a year earlier.

Despite fears in the early days of the pandemic that COVID-19 could become a bucket of ice in the Canadian housing market, the opposite happened. Interest rates fell to an all-time low, coupled with millions of Canadians have locked up their homes, suddenly needing more living space., the housing market was more like gasoline than water.

Average price of a resale home in Canada exceeded $ 716,000 in March… While average prices have declined slightly since then, they are still well ahead of pre-pandemic levels.

Ever-rising prices can make homeowners sleep soundly in their highly leveraged bedrooms, but many of that paper income is based on debt.

There are not only more mortgages than ever, but more than ever. During the quarter, Equifax said the average new home loan amount was $ 355,000. This is also the highest level on record and 20 percent more than a year ago.

Overall, Canadians owe more than $ 2.15 trillion in consumer debt. more than the value of Canada’s entire economy

Equifax’s Rebecca Oaks told CBC News that this surge in new home loans could be a problem if and when rates rise.

“A small change in interest rates can actually dramatically increase what the consumer wants. [come up with] in terms of these payments, ”she said. “That’s why we’re a little worried.

Rent and purchase puzzle

Adam Elgerby owns several houses in London, Ontario, half of which he bought in just the last year. In an interview, he said that in his opinion, buyers in some markets may enter through their heads because of the need, as he put it, “to keep up with the Jones.”

“There is a lot of speculative behavior,” he said. “There are many, hey, houses are only getting more expensive.”

Elgerby has about $ 2 million in mortgage debt in his name on his property, but he isn’t particularly worried about rising rates – or falling prices, for that matter – because he doesn’t live in any of them and doesn’t depend on their growth. in the price.

He is a homeowner and makes money by repairing houses in disrepair and renting them out to reliable tenants: students.

He lives frugally at his parents’ home in Barrie, Ontario, about 250 kilometers from his profitable stable. Even though he never made a six-figure income from his jobs in the tech sector, he amassed an approximately $ 4.5 million real estate empire.

Even before he lived with his parents, he rented a basement apartment in Toronto, working as the finance department on Bay Street.

“I was very frugal. I collected my meals. I am very, very careful. [with] the money I spend, “he said.

VIEW | Why Canadians Need To Overcome Rent Aversion:

Real estate investor Adam Elgerby says more people should consider renting their primary residence, as prices in many markets simply don’t count as investments. 0:30

Even before the current spike in prices, buying in Toronto never made sense for Elgerby, but he is comfortable with debt on his property in more accessible markets, because the numbers are working: buy improved housing, improve housing, find reliable tenants. , repeat.

“I’m a big believer in renting out where you live and owning what you can rent,” he said.

Eljerbi knows his lifestyle is not for everyone, but he would like more people to break out of the circle of borrowing more and more for something that will bring them very little money if all they do is live. this.

“When you look at real estate in general and mortgage debt, a lot of Canadians have taken on a significant amount of debt and are unaware of the fact that much of … is volatile,” he said. “As soon as they start to creep up in interest rates, even if they are insignificant, it starts to put pressure on your cash flow.”

Over their heads?

But not everyone thinks Canada has a mortgage debt problem. Sherri Cooper, chief economist at Dominion Lending Centers, says the panic over rising mortgage debt distorts reality.

She notes that the crime rate is close to historical lows, which suggests that the vast majority of people have not coped with the task. She also notes that nearly half of all Canadian homeowners do not have a mortgage on their homes, and recent changes in stress test rulesthat make it difficult to obtain a home loan have raised the bar for anyone who can buy-in.

“Most Canadians are forced to undergo even stricter stress tests than before, which is well above their actual mortgage rate,” Cooper said. “Even if rates rise by 2.5 percentage points, they are entitled to pay them at that level.”

Cooper says overall she’s not too worried about new buyers contributing to this mind-blowing $ 2 trillion in debt because they’ve proven their finances are more than healthy enough to counter it.

She said the pandemic was “an emergency period” for the Canadian economy, and “the part of the population that was able to apply for loans are people who still have jobs.”

“These are not people who live off government employees’ compensation,” she said. “So I don’t see this as a problem in the future.”

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