Global economy be damned. Things in B.C. are just fine, thank you very much. Just don't think about the declining quality of our health care and education or the 137,000 children living in poverty. It will just depress you and you need to keep your wits about you when Ottawa is lecturing you about the high levels of household debt that we're loading on. They've got a point.
Despite low interest rates, Canadians continue to struggle with high debt levels. While levels of non-mortgage consumer debt in Canada have stabilized in recent months, they're still at ridiculous levels as consumers continue to spend too much and then get whacked by usurious credit card interest rates and penalties. That's decreasing the net worth of many Canadians and throwing more people into poverty. Along with the rant, it would be nice if the government asked credit card companies to reign in the profiteering.
The news is not all bad. According to CMHC, in the 2011 Canadian Housing Observer, the percentage of vulnerable Canadians is only slightly above the 10-year average based on those who have a debt-service ratio [DSR] greater than 40 per cent. Your total debt-service ratio is the amount of your before-tax income that you use to cover housing costs and other debts.
In 2010, the proportion of Canadians who were financially vulnerable to interest rates increases, job loss or other economic shocks, based on their debt-service ratio was 6.5 percent, up from 6.14 per cent in 2009. The numbers are relatively low compared with 2000 and 2001 when they averaged around 7.5 per cent.
But those statistics don't tell the whole story. The main concern expressed by Minister of Finance Jim Flaherty and others who don't want to see a made-in-Canada mortgage crisis is that the amount of household debt hit more than 150 per cent of disposable income in the second quarter of 2011. A record high for Canada.
How will household debt affect the housing market? In B.C., we have big mortgages with high levels of credit card and credit-line debt piled on top. The appreciation in real estate prices has given homeowners a sense of invincibility based on their property assessments. But all that can come tumbling down, as it does from time to time.
We were lucky in Canada. Our housing sector didn't participate in the subprime mortgage debacle that crippled the U.S. economy. As a result, our housing sector was able to play a key role in lifting our economy out of recession as rock-bottom interest rates drove real estate sales and ultimately building starts and prices.
According to Flaherty, the government is on the sidelines for now, keeping an eye on the real estate market. In the past six years, they've intervened three times to tighten CMHC qualification guidelines for mortgage insurance. At the moment, they're spending a lot of time talking to the banks and strongly recommending they tighten up their income qualification guidelines for mortgages as well. Fortunately for Canadians, unlike our American friends, we do expect government to curb our enthusiasm for things that aren't good for us.
The banks are in the lending business so they aren't going to caution you not to borrow too much. It's up to you to keep your overall debt levels manageable if you're going to take on mortgage debt. Just because someone is offering you credit doesn't mean you have to use it. If you're buying or refinancing a home, insulate yourself from higher interest rates by locking in a five-year fixed term on your mortgage. With five-year rates hovering just above three per cent, you can't afford not to.
Deb Abbey is a real estate agent at Royal LePage City Centre in Vancouver. Contact her at abbeypartners.ca or email [email protected].
