Canadians have entered the debt danger zone that helped trigger real estate crashes in the U.S. and Britain.
The rise in debt levels comes as Canada’s housing market is showing increasing signs of weakness, with more than half of major markets seeing sales drop 10 per cent in September from a year ago and the average national price rising a scant 1.1 per cent over the same period.
The ratio of debt to income hit 163.4 per cent in the second quarter, up from 161.7 per cent at the end of last year, Statscan said.
“To see these numbers where they’re at now is deeply disturbing,” said Laurie Campbell, chief executive officer of Credit Canada Debt Solutions, which helps people lower their debt burdens. “We’ve got some serious issues to deal with in Canada.”
A debt-to-income ratio of more than 160 per cent was the mark that began the unwinding of housing bubbles in both the U.S. and Britain, said Royal Bank of Canada economist David Onyett-Jeffries.
For several years we have written and warned of the bubble in the Canadian housing market.
Unfortunately, our message has not been well received, and now, at the cusp of the great housing correction, the main stream media is beginning to clue into the magnitude of the issue.
Canadians are more vulnerable to a correction than Americans when their bubble popped in 2006 & 2007.
The primary reason for this vulnerability is the way houses are financed in Canada. Most mortgage holders do not lock in their interest rates for 15 or 30 years as Americans do. Canadians tend to take short interest rate or even floating interest rate terms on mortgages that are often amortized for 25 to 35 years. Each renewal period leaves them at the mercy of the markets (often every 2 to 3 years) where they roll the dice gambling on falling or stable interest rates. For many, the next renewal will be critical. Bond markets are more fragile than most people realize, and may demand higher interest yields to compensate for rising risks.
What Canadians are in denial of is the quicksand of housing market debt.