Home ownership at record levels… so is mortgage debt
By Colin Perkel – The Canadian Press
Never before have so many Canadians owned homes. And never before have they owed so much for the privilege.
Interest rates at or near historical lows combined with low unemployment and recent changes that allow people to buy houses with less money down and pay off mortgages over longer periods resulted in 68.4% of Canadians in the housing market in 2006.
That’s up from 65.8% in 2001 and 60% in 1971, according to the latest Statistics Canada data.
The increase comes despite the fact that the cost of housing in many cities across the country has gone through the roof, outstripping inflation by far, while median incomes have essentially flatlined.
“Low mortgage rates have helped offset much, but not all, of the impact of rising house prices in recent years on mortgage debt-service costs,” said Bertrand Recher, a senior economist with Canada Housing and Mortgage Corp.
The overall result has been a small increase in the percentage of Canadian homeowners who spend more than 30% of their gross income on shelter costs, according to Statistics Canada census data.
But latest CMHC figures show a sharper spike in mortgage-carrying costs in terms of after-tax income.
In 2007, average household spending on monthly mortgage payments had reached 37% of after-tax income, up from 32% in 2006.
“That’s significant — mortgage carrying costs are increasing,” said Mr. Recher.
“This burden is heavier on the shoulders of first-time buyers because they don’t have the equity.”
Most analysts, however, see little comparison between the Canadian housing market and its American counterpart, where hundreds of thousands of homeowners suddenly found themselves in way over their heads, creating a financial meltdown.
Canadian financial institutions jealously guard the number of mortgage defaults they endure. But among the country’s big banks, only about 0.27% of homeowners were three months or more in arrears on their payments.
“Anecdotally, we are not seeing any rise in arrears or defaults across the country,” said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, an organization that speaks for mortgage lenders.
“Canadian underwriting standards by lenders and mortgage insurers are much more thorough than they are in the United States. Canadian lenders are much more conservative.”
One key factor in the rise of home ownership is the relatively new option of mortgages amortized over 40 years.
Paying off loans for homes over a longer period means much higher total interest costs, but lower ongoing monthly payments. The effect is increased affordability. Growth in such long-term mortgages has been nothing short of dramatic, figures show.
Between the fall of 2006 and fall 2007, 37% of all mortgages carried amortizations longer than 25 years, up from nine per cent in the preceding period.
“Clearly they’re very popular,” said Mr. Murphy, adding that not only first-time buyers are opting for the new choice.
One real estate investor-analyst who disagrees with the rosy assessment of the Canadian market is Liberal MP Garth Turner, who argues too many people, especially younger buyers, are taking on too much debt to buy into the housing game.
Low interest rates coupled with 40-year amortizations and negligible down payments might make it easier to buy higher priced homes, but it’s also leaving buyers vulnerable, Mr. Turner says.
“The inevitable conclusion is that the current Canadian real estate market is floating on a sea of unrepayable, and perhaps unserviceable, debt,” Mr. Turner maintains in his book, “Greater Fool.”
Collectively, it is a lot of debt.
In total, Canadians owe an amount fast approaching $850-billion on their homes, more than double what it was a decade ago, with percentage growth in double digits in recent years.
If trends continue as expected, the value of all outstanding mortgages will surpass the $1-trillion mark some time toward the end of next year.
The federal government is keeping a close eye on the developments, according to Finance Minister Jim Flaherty.
“We have been monitoring the mortgage market, as we do, and we’ve seen a trend toward longer amortizations and smaller down payments, and that is a matter of some concern,” Mr. Flaherty said recently.
“We’re continuing to watch that.”
Mortgage insurers, who take care of defaults, have also tightened their criteria.
Still, any concerns over the situation appear, at least for the moment, to be outweighed by more positive views.
Overall economic conditions remain healthy in Canada, with unemployment close to historical lows, Mr. Recher noted.
In addition, the forecast is for the rapid growth in house prices to moderate substantially while interest rates are expected to remain relatively stable, at least over the next year or two.
One group blissfully unconcerned about rising carrying costs are those aging baby boomers who have paid off their mortgages, a group that has grown in recent years.
Ten per cent of homeowners hold no mortgage at all, according to Statistics Canada.
Many long-time owners have taken their equity and downsized to condos, joining the flood of first-time buyers who have gained their first toe-hold in the world of home ownership by entering the relatively affordable condo market.
About 10 per cent of households are now in condos, a tripling in 25 years.
“There’s been quite an increase… in the percentage of owner-households that are in condos,” said Willa Rea, senior analyst with Statistics Canada.
“There’s a good deal of young people buying in and becoming homeowners. We’ve seen quite an increase there.”
While shelter costs for home owners have risen, they remain lower than those for renters, who typically pay a bigger share of income to keep a roof over their heads. For renters, the burden remains at roughly 40% of gross income.
“That hasn’t changed,” said Mr. Rea. “It’s pretty stable there.”
The analysis released Wednesday is based on census data collected more than two years ago. The next census will be taken in 2011.
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