Saturday, April 23, 2011

Canadian Households In Trouble, or Not?

We've not heard anything out of CAAMP lately. Usually there is some kind of April/Spring report. This matters only because various blogs and outlets have been quoting the November 2010 report in support of those wise, highly cushioned Canadian households.

Ability to Afford Interest Rate Increases
Given that interest rates in Canada have been at very low levels for a prolonged period, concerns have been expressed that many home owners may be unable to afford their payments when rates inevitably rise.
. . .
This issue of CAAMP’s “Annual State of the Residential Mortgage Market” further explores the issue. It confirms, again, that a vast majority of Canadians have substantial capacities to afford higher interest rates. The survey asked mortgage holders to indicate “the amount at which, if your monthly mortgage payment increased this much, you would be concerned with your ability to make your payments”. The responses indicate:

  • The average amount of room is $1,056 per month on top of their current costs.
  • Just 2% indicated that they have no room (the affordable increase is $0).
  • A further 2% indicated their room is $1 to $99.
  • 5% indicated that their room is $100 to $199.
  • 6% reported room in the range of $200 to $299.
  • This leaves 84% whose capacity is $300 per month or more.
  • Even for those who originated the mortgage within the past year, the distribution of answers is essentially the same.

There is a sizable minority (about 350,000 out of 5.65 million, or about 6%) who would be challenged by rate rises of less than 1%, and a further 225,000 (5%) have thresholds in the range of 1.00% to 1.49%.

I don't know why this report was seen as great news. 575,000 households are living on borrowed time. If expected rate increases pushed half of these households to sell, that alone would whack the market. Remember, real estate prices are set on the margin, a few percent out of line, up or down, sways a lot of valuations.

Now we have a survey done by TD, just out:Canadians struggling to save and pay off debt
In the report, 38 per cent of Canadians surveyed said they had no savings at all.
. . .
One-third of Canadians who responded to the recent online survey also said they didn't have enough money to cover living expenses like rent or food bills.

The survey found that 54 per cent of the 1,003 people who took part in the survey said it was a real struggle or impossible to save.
. . .
On the flip side, 30 per cent of respondents said they had enough money saved to cover living expenses for at least four months.

The fiscally healthy 1/3 aren't going to save you, by any means. In the U.S. roughly a third rent, a third own outright (this used to be true in Canada but has fallen to something around 25%) and a third own with a mortgage. That housing disaster in the U.S. was caused by a mere 1/3 of the households.

Back to the CAAMP survey. As to the $300 a month cut off. That applies to the average mortgage across Canada. If we take an average house price of 345,000 as a mortgage at 3.5% interest rate, that's $1550 a month. At 5% interest rate, that's $1850 a month. Sure enough, $300 with no margin for error in the interest rate hike. But Vancouver and Toronto are far above the average price. Under the same terms, at the average price, the jump in payments will be $700 in Vancouver and $380 in Toronto. $80 might not sound like a lot, but given that 225k households are pushed over the fiscal edge by an additional .5% interest rate hike, that higher average will accentuate the panic selling in those cities when households get into trouble.

No comments: