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Maintaining low interest rates too long could spell trouble ahead: RBC economist

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guest | 27 Jul 2011, 03:25 PM Agree 0

The household debt-to-income ratio in Canada surpassed that of the U.S. in 2011, according to the report, now at 147%, compared to 120% just a decade earlier. But while the U.S. ratio has declined since 2007, Canada’s has been rising.“The very source of Canada’s relative success during the worst of the credit crunch – a banking sector that kept on lending and households that kept on buying – could yet spell its undoing if newly enlarged household debt loads prove too onerous to bear,” said Eric Lascelles of RBC Global Asset Management. He said it’s a misconception that the Bank of Canada shouldn’t raise interest rates because of the negative affect it will have on mortgage holders. “The longer the bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later,” he said.More and more Canadians are choosing home ownership -- a trend that was partially caused by a rise in average household income, said Lascelles.But while Canadian households have debts valued at 1.5 times their annual disposable income, they also have assets valued at 7.5 times their annual disposable income. Net wealth continues to grow, said the report, but there’s still a third of the population in Canada with debt as high as three to five times their annual income.Lascelles also examined the housing markets of various cities in Canada. While Vancouver has historically been pricier than other Canadian cities, there is reason for special concern this time around. “There remains a significant and growing affordability gap in the city, and it should be viewed as the canary in the coal mine for the rest. Whatever happens to the country, Vancouver should lead the way.”Toronto, Calgary and Edmonton are more reasonably priced, but a rise in interest rates could change that very quickly.“Home prices are perhaps a touch too high today, but will be substantially too high once interest rates rise,” said Lascelles.
  • Gaya Mahabir | 27 Jul 2011, 06:04 PM Agree 0
    Great report:
    Here in the Greater Toronto Area, people will buy regardless of the potential interest rate increase or not.
    Homes are still affordable especially in the areas surrounding Toronto where you can get a 3 bedroom bungalows with fairly large lot for the mid 300K, also several townhomes and condos that fit under the 300 mark

    There are many people that just want to get out of renting and have the satisfaction of home ownership as soon as they have enough down payment and can qualify.

    Most of these folk are in the mid average income and are currently renting for 1200-1500 a month an easy match for purchase in the 3-400K price range.

    Getting the usual 5 year term-lower variable mortgage rate (say prime -75 pts) are a bit challenging since they need to qualify a the BOC rate of 5.39.

    Hence the current fixed 5 yr rate of approx 3.79% might be the only choice for this group of individuals and it just might be the Better and Wiser choice now that they are locked in secure for a full five years.

    Would an increase affect these folks? ….not as much- and if they did happen to get a variable rate then they would have had to qualify at the Bank of Canada 5.39%.
    Yes...increase in rate is sure to come, hopefully its not too drastic and frequent.

    Home ownership is still on the minds of most renters and they all want to have that sense of home ownership and pride of potentially calling there residence there own
  • Gaya Mahabir | 27 Jul 2011, 07:04 PM Agree 0
    Great report:
    Here in the Greater Toronto Area, people will buy regardless of the potential interest rate increase or not.
    Homes are still affordable especially in the areas surrounding Toronto where you can get a 3 bedroom bungalows with fairly large lot for the mid 300K, also several townhomes and condos that fit under the 300 mark

    There are many people that just want to get out of renting and have the satisfaction of home ownership as soon as they have enough down payment and can qualify.

    Most of these folk are in the mid average income and are currently renting for 1200-1500 a month an easy match for purchase in the 3-400K price range.

    Getting the usual 5 year term-lower variable mortgage rate (say prime -75 pts) are a bit challenging since they need to qualify a the BOC rate of 5.39.

    Hence the current fixed 5 yr rate of approx 3.79% might be the only choice for this group of individuals and it just might be the Better and Wiser choice now that they are locked in secure for a full five years.

    Would an increase affect these folks? ….not as much- and if they did happen to get a variable rate then they would have had to qualify at the Bank of Canada 5.39%.
    Yes...increase in rate is sure to come, hopefully its not too drastic and frequent.

    Home ownership is still on the minds of most renters and they all want to have that sense of home ownership and pride of potentially calling there residence there own
  • Geoff Lander | 28 Jul 2011, 02:44 AM Agree 0
    What I find interesting is that the Bank guys conveniently don't break down the household debt into secured mortgage and unsecured consumer debt. As a Mortgage Agent I am constantly astounded by how much the Banks have given out to my clients in high interest unsecured credit cards and lines of credit. High amounts of this type of credit seems much more troubling than typically conservative mortgage lending.

    I would suggest that having $200K in mortgage debt is healthier overall than $100K in mortgage debt and $100K in credit cards, or even $150K of mortgage debt and $50K in credit cards.

    So while I agree that increased household debt levels should not be ignored, perhaps it would be prudent to spend more time talking about the relative health of the specific elements that make up the total, and start making more noise about where the problems more realistically exist.

    Of course that would focus more attention on the credit card and consumer lending habits of the Banks and the 20%+ interest they charge.

    As I said, interesting....
  • Geoff Lander | 28 Jul 2011, 03:44 AM Agree 0
    What I find interesting is that the Bank guys conveniently don't break down the household debt into secured mortgage and unsecured consumer debt. As a Mortgage Agent I am constantly astounded by how much the Banks have given out to my clients in high interest unsecured credit cards and lines of credit. High amounts of this type of credit seems much more troubling than typically conservative mortgage lending.

    I would suggest that having $200K in mortgage debt is healthier overall than $100K in mortgage debt and $100K in credit cards, or even $150K of mortgage debt and $50K in credit cards.

    So while I agree that increased household debt levels should not be ignored, perhaps it would be prudent to spend more time talking about the relative health of the specific elements that make up the total, and start making more noise about where the problems more realistically exist.

    Of course that would focus more attention on the credit card and consumer lending habits of the Banks and the 20%+ interest they charge.

    As I said, interesting....
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