The howl

On Tuesday the finance minister will drop his budget. Looks like it’ll contain incentives to borrow and spend money on houses (and Teslas). The economy is slowing. Got it. But do we really need more debt in Canada?

Some background. Got lots of it on Friday. What a mess we’ve created.

First the debt, 80% of which has been accumulated to buy residential real estate. The debt-to-disposable-income ratio now sits at 174%. Yes, another record. The amount of money people are borrowing grows as wages fall behind inflation. We’re also spending more of what we earn servicing existing debts. The amount we pour into loan payments is the highest in 12 years.

Mortgages are massive. So are HELOCs. They now account for over 47% of consumer credit at the banks. Says a Scotiabank report (this is scary): “The rise in HELOC borrowing may be explained… by the increase in the value of residential assets held by households and the lower rate of interest offered on most HELOC products. Borrowers may also be borrowing against their homes to repay principal or simply to capitalise interest due on other types of debt, thereby enabling excessive borrowing.”

So Canadian families owe more ($2.2 trillion) than the size of the entire economy. New borrowing has increased. Debt relative to income is expanding, and spending on that debt is eating into finances as never before. Now folks are using lines of credit to refinance existing debt so they can borrow more. As stated, most of this money has gone into housing – and continues to do so.

So, second, what’s happened to that real estate we so sacrificed to obtain?

It’s not often that an official national realtor media release uses words like “plummeted” and “plunged”, but that’s now happened. In describing February sales across this land CREA pulled no punches. The month/month decline was an unprecedented 9.1%, taking sales to a 7-year low, affecting 75% of all markets including the major markets. Prices have fallen and the industry is stressing over the stress test – which is making the inevitable downturn deeper.

“For aspiring homebuyers being kept on the sidelines by the mortgage stress-test, it’s a bitter pill to swallow when policy makers say the policy is working as intended,”  CREA’s boss howls. “Fewer qualified buyers means sellers are affected too.” Adds the realtor’s chief economist: “The housing sector is on track to further reduce waning Canadian economic growth. Only time will tell whether successive changes to mortgage regulations went too far, since the impact of policy decisions becomes apparent only well after the fact.”

So what’s the bottom line?

Shocking, actually. Thanks to the decline in overall real estate values – the first in a decade – Canadian families have lost $30,000,000,000. That’s thirty billion – compared to where things sat just a year ago. Never before in the last twenty years have homes across the country fallen thus in value. And after we added so much debt to get one. Many must feel crestfallen. Betrayed, even.

The realtors forecast further sales declines in 2019 – the lowest per capita activity in twenty years. If the economy does slow, if job creation moderates, if wages trail inflation, if oil declines, if trade wars persist, or if our historic level of indebtedness catches up to us, things might grow worse for housing and those whose net worth is wedded to it.

The budget on Tuesday, says the government, will goad more young people into buying real estate by increasing mortgage amortization. Payments would drop a little. Interest charged would increase. The obligation would be extended to thirty years.

But, Mr. Morneau. Is more debt the answer?