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Canada’s top money managers are concerned by record household debt levels across the country, according to an informal BNN survey -- yet few Bay Street veterans are bothered by rising home prices.
More than four dozen Canadian investment executives provided their views on several year-end topics through an online poll in mid-December. Nearly two thirds of respondents (63 per cent) said they were concerned about rising household debt levels in Canada, while roughly one third (37 per cent) said they were not.
The opposite result appeared when respondents were asked whether they were worried about a possible housing bubble in Canada: just over one third (35 per cent) said yes, while nearly two thirds (65 per cent) said they were not concerned.
Despite the contrary results, the two questions are directly linked.
Household debt across Canada reached several record highs in 2015, with the latest height announced in mid-December when Statistics Canada released its data for the third quarter. At the time, StatsCan reported the ratio of household credit-market debt to disposable income rose to 163.7 per cent in the three months ended Sept 30. Total credit-market debt also hit a new record of $1.89-trillion during the same period, with mortgage debt accounting for the lion’s share at $1.23-trillion.
That is the connection to so-called housing bubble risk. The more debt households take on relative to their income, the more difficult it will be to pay off. When households fall on hard times – through job loss, illness or other unexpected changes to income levels – repayment becomes even more of a challenge.
StatsCan also noted in its third-quarter report that the ratio of household debt to total assets – broadly seen as a better way of calculating people’s ability to pay off their debts – rose to 17 percent from 16.9 percent in the second quarter. The minor increase marked the second consecutive quarter the figure has risen.
Many of Canada’s most noted economists, along with the Bank of Canada and the federal government, have long been concerned with rising household debt levels and the risk posed to housing market stability. Bill Morneau, who was appointed Finance Minister under newly elected Prime Minister Justin Trudeau last month, introduced higher down payment requirements for homes priced above $500,000 on December 11th as part of a trio of measures aimed at taming the country’s runaway housing markets.
Nonetheless, real estate developers believe there are few, if any, reasons to believe home prices are going anywhere but up in the near term. Barry Fenton, CEO of Lanterra Developments (which is the fourth-largest condo builder in the Greater Toronto Area), told BNN in early December he expects Toronto condo prices to skyrocket as much as 40 percent from already record-high current levels over the next three years. That would imply an average condo price in the GTA of more than $580,000 by the end of 2018.
Brad Lamb, dubbed Toronto’s “Condo King” through his role as CEO of Lamb Development Corp., told BNN last week only “draconian and stupid” government intervention would slow down the pace of home price increases in Toronto and Vancouver.
Rising interest rates are seen as most likely to slow the growth of housing prices. That is because higher interest rates will in many cases translate to higher mortgage payments which, in turn, will put even more pressure on Canada’s most indebted households.
However, nearly two thirds of respondents in BNN’s informal survey (64.7 percent) said the Bank of Canada will not push rates higher until 2017 at the earliest.
That explains why Bay Street is not concerned about Canadian home prices, at least, not in 2016. What happens when interest rates do begin to rise – as they inevitably will – will likely prove a much more difficult question for Bay Street to answer.