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Up to our necks in debt

There are increasing indications that our reputation of being a financially conservative in Canada is more myth than reality.  As a group, we’re taking on more debt than ever before and finding ourselves with less of a personal safety net should the economy take a dive.  Since 2001 the number of people over 60 that still have a mortgage has been steadily increasing, and the mortgages that we all hold are of more and more exotic varieties.  From todays Vancouver Province: Why we’re up to our necks in debt.

A rash of recent reports paint a scary picture of Canadians as spending like drunken sailors, leading to the prickly question of whether we should be forced to save money.

A Statistics Canada study showed Canadians are finding themselves with two mortgages and deeper in debt than at any time in their lives. They are increasingly house poor, and with housing values sliding, they often owe more on their properties than they’re worth.

The StatsCan study came out at the same time that the Office of the Superintendent of Bankruptcy Canada reported that personal bankruptcies reached their highest level in more than four years during April, up 19.3 per cent over the previous month and 18.3 per cent over the previous April.

And things will only get worse if recent numbers showing a gross domestic product decline during the last quarter continue, signalling an economic downturn, and if unemployment rates should start to rise.

As it is, mortgage payments make up 37 per cent of average household spending in 2007, up from 32 per cent a year earlier.

And those mortgages are getting more ‘interesting’.  The common refrain that the Canadian housing market is not as vulnerable to downturn as the US market  because we don’t have ’sub-prime’ mortgages is only part-true.  What we do have is an mortgage insurance market that was liberalized in 2006 and has dramatically changed the landscape in the last few years with the introduction of zero-down, 40 year terms and adjustable ‘teaser’ rate mortgages:

With interest rates dropping, consumers might consider a front-loaded variable- rate mortgage.  This option gives you a larger-than-normal discount from the prime interest rate for an initial period, say six months, before you decide whether to lock into a fixed rate.

Longer amortization periods, now up to 40 years, also are new.  Holt estimates longer-term mortgages now account for three quarters of monthly insured purchase applications in Canada, with 40-year products accounting for half of that.

So will following the US lead into the area of ‘exotic’ mortgages lead to a similar result?  Only time will tell, but it is interesting to see that this topic seems to be getting more attention within the government.  That first article had this bit of info that was new to me:

Finance Minister Jim Flaherty recently suggested it might be wise to outlaw 40-year mortgages.

With up to a third of new mortgage applications opting for the longest term, removing that option could have a dramatic impact on our housing market at a time when it appears to be already slowing due to affordability concerns.

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111 Responses to “Up to our necks in debt”

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  1. 1
    Bob from Vancouver Says:
    The end is here, now i wont be able to give away my house what have i done.
  2. 2
    Big Crash Says:
    Yet, the denial continues: “No, the economy is still going strong and RE prices still go up”. I s**t you not, that’s what the majority of people would say!!
  3. 3
    Big Crash Says:
    Ooops forgot to mention the 2010 Olympics… Yup, the two-week event will save the day, and RE prices will keep going up!!!
  4. 4
    Re-diculous Says:
    Interesting: “Finance Minister Jim Flaherty recently suggested it might be wise to outlaw 40-year mortgages.”

    Has that horse not already left the barn?

  5. 5
    Bubble Lad Says:
    Thank God for the Olympics…the OLYMPICS (lifting arms heavenward, torrent of tears of pure joy streaming down face) THE OLYMPICS!!! (collapses in heap of exhaustion and utter relief).
  6. 6
    Thums up2 Says:
    “Yet, the denial continues”

    YES B.C.Economy countinue to grow stronger because of the housing crash pain in america will be lift up by the same sector HOUSING it self where our supportive industries going to start pick up more bussiness,currently we are doing fine while some cities across the border are bottom out.It’s time to go back to work,actually they have already start going back to work.

  7. 7
    Thumbs up3 Says:
    YES!! BC economy go strong fast - housing always UP UP UP! America be pain but BC always fine good and now work going bettter upper. Magic place Vancouver I buy condo and think STRONG! then values go better forever and ever!
  8. 8
    umdesch4 Says:
    Thums up2:

    You seem to be missing a step. To borrow a popular meme, the plan you’ve describe seems to consist of:

    1. American housing crashes
    2. ????
    3. Profit!! (for BC economy)

    I fail to see the connecting step 2. Are you saying that somehow a housing crash in the US will be followed by a rash of new starts? Or am I missing your point entirely?

  9. 9
    Bubble Lad Says:
    The Gospel According to Thums up2.

    Today’s reading is from the Book of WTF?

    So sayeth the God of Real estate:

    “because of the housing crash pain in America will be lift up!”

    (closing book respectfully)
    Amen.

  10. 10
    exx Says:
    B.C. real estate sales drop from one year ago

    Muir added that the inventory of unsold properties may edge lower as properties priced in anticipation of a still accelerating market get pulled off the market or re-priced “according to today’s market realities.”

    Just another reminder from our local MSM that the jig is up.

  11. 11
    Bubble Lad Says:
    I think it’s time we put together a short, inspirational collection from KRsh, Krash, Thums up, or WTF it’s name is. Maybe a day calendar? Everyday could have a picture of a shiny, pasteboard condo, and a bit of wisdom from this master of positive thinking (photoshop ideas welcome).

    I think today’s gem is:

    “It’s time to go back to work,actually they have already start.”

    Right up there with “We have nothing to fear, but fear itself.”

    I feel a warm glow over my body - and here I was thinking doom and gloom! Thanks…whoever you are…

  12. 12
    patriotz Says:
    Has that horse not already left the barn?

    It was Flaherty who let it out in the first place.

    I think the Cons have wrecked their chances for re-election. Their policies, from the wrongheaded GST cuts to the irresponsible 40 year and 0% down mortgages, will magnify the impact of the upcoming US recession and hamper the government’s ability to compensate for it. Other parties will blame them for this and rightly so.

    One other point that must be made - looking at Canada-wide figures obscures the magnitude of BC’s debt addiction. Every measure I’ve seen is as bad as in the bubbliest US states. Our savings rate is now a shocking -8%. Compare with +6% ten years ago, under the evil Glen Clark.

  13. 13
    jesse Says:
    Great post, Pope. You must mention stated income which, while a reasonable innovation in itself, is prone to abuse and miscalculation. For example a Realtor with 5 years experience goes stated income and buys a property. What are the chances their income for the past 5 years will continue for the next 5? Basically zero. The banks can only hope they did their math correctly and factored in the cyclical nature of real estate into their calculations.

    Anyways, with the negative savings rate the debate around whether or not there is “subprime” or not is meaningless. Call it what you want, prime or subprime, the debt levels are high and unsustainable. If guys like Flaherty are saying this, two years behind their American counterparts making similar observations, that’s a bad sign.

    Investors: it’s not too late! Sell now at an aggressive price and walk away.

  14. 14
    bdk Says:
    Krissh/thumsup/browntown must be wishing he could erase that comment, that is his stupiest comment today.

    The market is going down so that means it’ll go up

    It’s still mad that she/he can’t sell her condo, it’s been three weeks now.

  15. 15
    Big Crash Says:
    Thums Up2 says:
    YES B.C.Economy countinue to grow stronger because of the housing crash pain in america will be lift up by the same sector HOUSING it self where our supportive industries going to start pick up more bussiness,currently we are doing fine while some cities across the border are bottom out.It’s time to go back to work,actually they have already start going back to work.

    I say: ?????

  16. 16
    Anonymous Says:
    I could buy his/her condo!! Meeeee meeee!

    But, I wont.
    Sellers may believe in greed, but as a potential buyer I believe in value.
    I am focusing my time/energy on good investments now, housing is the worst investment now, for a few years to come. Why buy the sausage now when it will go on sale later? ;]

  17. 17
    Dave Says:
    That was a pretty hollow article in that it didn’t provide any real data to back up the assertion that debt levels are too high or are unsustainable.

    17% of homes have at least one mortgage. So, 83% of homes in Canada have no mortgage at all. Doesn’t sound so scary when you consider the later.

    Of course bankruptcies are up due to the downturn in manufacturing back east and it should be no surprise the levels are at a 4 year high.

  18. 18
    no_subprime_here Says:
    Dave, I like your optimism, but 17% is wrong. They might have meant second mortgage.

    The number of households with a mortgage is more like 60% according to
    Statistics Canada

  19. 19
    Warren Says:
    Muir is on CKNW right now. According to our good friend Muir, supply and demand aren’t out of whack enough to forecast price declines. Hmmmm….
  20. 20
    Ari Telias Says:
    The “turn” is happening faster than I expected. I just told the wife yesterday: “We are partying in the blogoshpere.The main media will pick it up in a month or two!”…
    And we got it today!

    I have a feeling things will happen much faster here. Like a whiplash - a small movement on one end but a very fast movement in the other. Seems we were the long end when the US was the short end, all things considered.

    If I am right (IF), then the downturn here will happen a. Faster. b. Deeper than the US.

    Best regards,

  21. 21
    Drachen Says:
    Dave

    “didn’t provide any real data to back up the assertion that debt levels are too high or are unsustainable.”

    British Columbia’s citizens have a net negative savings rate. That is, by it’s nature unsustainable.

    “17% of homes have at least one mortgage.”

    Looks like that was a typo, he probably meant two mortgages.

  22. 22
    Drachen Says:
    Here’s something interesting however.

    “mortgage payments make up 37 per cent of average household spending in 2007″

    Approximately 65% of households have a mortgage. So of a mortgage holder’s income that would be 57% of the household income spent on the mortgage (once you remove the 35% who pay 0% of their income on their mortgage).

  23. 23
    beatstreet Says:
    Let’s face it, today a bushel of wheat is a better bet than a downtown condo or Dunbar SFH.
  24. 24
    Vansanity Says:
    Nice catch no_subprime_here! I thought 17% sounded extremely low! Should send that link to the journalist that wrote that article, if you have not already.
  25. 25
    jesse Says:
    “I just told the wife yesterday: “We are partying in the blogoshpere.The main media will pick it up in a month or two!”… And we got it today!”

    This is why communication with the wife on this subject is so important. I was lucky enough to make some passing comments in 2006 about a friend who had property in Sacramento and was refusing to sell, to which I said they were crazy not to offload it as soon as possible. Now in 2008 they are negative equity, still with the property, and I remind my wife about my previous prognostication every few weeks. +1 credibility.

  26. 26
    jesse Says:
    “Approximately 65% of households have a mortgage. So of a mortgage holder’s income that would be 57% of the household income spent on the mortgage (once you remove the 35% who pay 0% of their income on their mortgage).”

    I’m not sure the stats around the 57% of income spend on a mortgage come from. The stats I point towards are a 32K increase in households with mortgages paying 30%+ of household income towards housing from 2001-2006. The % of total households in this situation increased as well. Most households are not up to their gills in debt but the trend is for more of them to be and that is going to be what matters.

  27. 27
    Burden of Proof Says:
    “That was a pretty hollow article in that it didn’t provide any real data to back up the assertion that debt levels are too high or are unsustainable.”

    Ha, ha! That is your MO, Dave!

  28. 28
    Dave Says:
    British Columbia’s citizens have a net negative savings rate. That is, by it’s nature unsustainable.

    You can’t ignore demographics with our savings rate. With boomers retiring, it will shift the percentage. How much, I don’t know.

    It may very well be possible that a negative savings rate is completely normal with a large demographic of retired people.

  29. 29
    Anonymous Says:
    Negative savings rate may be completely normal with the huge dope industry and billions in unaccounted dollars.
  30. 30
    alexcanuck Says:
    and I remind my wife about my previous prognostication every few weeks.
    And spend a couple of nights on the couch? ;-)
    Sorry, just had to toss that out.
  31. 31
    jesse Says:
    “And spend a couple of nights on the couch?”

    :) Nah. We resisted the urge to buy since ‘06 and have saved piles. Now we’re going to “save” even more by watching prices fall.

  32. 32
    Raincouver Says:
    Muir is on CKNW right now. According to our good friend Muir, supply and demand aren’t out of whack enough to forecast price declines. Hmmmm….

    Just watched him on Global news, he chuckled his way through the interview but did concede ‘maybe a couple percent’ drop in prices.

  33. 33
    alexcanuck Says:
    I just went back over all 325 comment on the weekend thread. (Is 325 a record? At least people are talking)
    “Dave” provided a grand total of three sources for all his “facts”
    http://www.bcrea.bc.ca/economics/trends … hCheck.pdf
    http://www.cucbc.com/publications/econo … 07octc.pdf
    http://www.cucbc.com/publications/econo … g2008c.pdf
    One from BCREA, two from Helmut Pastrick.
    Good, solid reporting there!
  34. 34
    patriotz Says:
    It may very well be possible that a negative savings rate is completely normal with a large demographic of retired people.

    BC doesn’t have a large demographic of retired people. It’s the same as the Canadian average. Inflows of retirees to BC are nowhere near as big as many people think, and have been balanced by inflows of younger people.

    It’s the historically slow-growing provinces, SK.MN, and Quebec east, which have the oldest demographics.

  35. 35
    Vansanity Says:
    For those that can’t get enough Muir:

    BC Home Sales Plunge in May

    http://www.canada.com/victoriatimescolo … 0883a29500

  36. 36
    Drachen Says:
    Anonymous

    “Negative savings rate may be completely normal with the huge dope industry and billions in unaccounted dollars.”

    As I’ve said many times before. The dope trade is organized. They know why Al Capone went to jail. They do their taxes like everyone else (well a little more creatively but nonetheless…) Does the term “laundering” mean nothing to you other than the textiles context? Laundered money is recorded, albeit not from the correct source so it wouldn’t skew the stats.

    Dave

    “You can’t ignore demographics with our savings rate. With boomers retiring, it will shift the percentage. How much, I don’t know.”

    Our demographics are not significantly different from other places. Places with positive savings rates. What we have in common with other places where the savings rate is negative is a real estate bubble. Keep trying, eventually you might say something that makes sense.

  37. 37
    Thums up2 Says:
    Mortgage debt is a best alternate than renting a place for the following reason.
    1.Mortgagee can live in desirable place forever.
    2.Mortgagee will have benifit of inflation.
    3.Mortgagee won’t be priced out as long he/she pay the mortgage payment.
    4.Mortgagee can enjoy the convenience of work place and school for their childrens.
    5.Mortgagee will earn the appreciation value decade after decade on their purchase.
    6.Mortgagee dont have to waste his/her time thinking about housing or affordability.
    7.Mortgagee don’t have to pay increased rent time after time and no rent at all after mortgage term.
    8.Mortgage payment could be advance every year by paying 15% extra on your mortgage when the family income increase and mortgage payment go down to lower down the borrowed principle amount.
    9.Mortgagee don’t really have to wonder place to place with eviction or moving notice.

    mortgage debt is every where in the world people buy and don’t buy that for their own convenience,so basically this article tells borrowing a mortgage is too common.they had mention the point from “DAVE” about affordability not the income and they are trying to tell people what kind of advance mortgage is availabel in the market with no presure on interest rates also like to tell the buyers that our market and economy is good with no subprime mess.

    10.“OUR OWN HOME IS A WONDERFUL PLACE ON EARTH”

  38. 38
    Bubble Lad Says:
    I really like that:

    “Our own home is a wonderful place on earth” - catchy, sort of sounds like a Carpenters song - that has to go on the day calendar. Thums 2/Krsh HAS to be a put on. No one could mangle grammar that badly.

  39. 39
    moldcity Says:
    Dave, I’m no economics expert, so maybe thats why I don’t understand your prediction from the previous story:

    put me down for 12 to 18 months of gains. In other words, if there is a correction, then I predict values will drop from 10 to 15% (nominally). So, if it breaks 15%, I will have been wrong.

    How can a 10 to 15% drop in price mean 12 to 18 months of gains?

    House prices are up 5.9 percent from last may, so wouldn’t an even smaller drop eat up 12 months of gains? A fifteen percent drop in prices is equal to almost 30% in gains is it not?

  40. 40
    Dave Says:
    How many languages do you speak Bubble Lad?

    I don’t understand making fun of somebody’s grammar when it isn’t in their native language. If anything, they should be commended.

  41. 41
    Dave Says:
    Mold, if you read the last discussion thread, you will find that my observation of prior corrections in Vancouver is that they turn the clock back about 12 to 18 months.

    Based on that, my prediction would be that a correction would rewind us back to somewhere between the nominal prices of November 2006 and May 2007. That’s roughly a range of 10 to 15%.

    Yes, based on the latest data from May 2008, one year would strictly be 5.9%. 13 months would probably be 10% and 18 months roughly 15%.

    I don’t follow you last question (RE 15% drop being equivalent to 30% gains).

  42. 42
    Anonymous Says:
    “Muir is on CKNW right now”

    WKRP in Cinncinatti???

  43. 43
    Bubble Lad Says:
    Come on:
    “Our own home is a wonderful place on earth”.
    give me a break. There’s no way that’s a mistake. I think Krsh has been putting us on the whole time.
  44. 44
    Dave Says:
    I just went back over all 325 comment on the weekend thread. (Is 325 a record? At least people are talking)
    “Dave” provided a grand total of three sources for all his “facts”
    One from BCREA, two from Helmut Pastrick.
    Good, solid reporting there!

    Data is data. Ultimately, it all comes from reliable published sources (e.g. statscan, MLS, etc..).

    What would you prefer I use? Tarot cards?

    What are your sources?

  45. 45
    Swirlyman Says:
    Renting a place may be better alternate than mortgage debt for the following reason.
    1.Renter can live in more desirable place than what he/she could afford to buy.
    2.When time comes to renew mortgage at higher rates, mortgagee will suffer effects of inflation.
    3.Renter can stay as long as he/she pay the rent.
    4.Renter can enjoy the convenience of work place and school for their childrens.
    5.Renter will earn the appreciation value year after year on their savings, until house is cheap enough to buy.
    6.Renter dont have to waste his/her time thinking about house maintenance or interest rates at mortgage renewal time.
    7.Renter don’t have to worry about rent increases above rent control levels.
    8.Renter’s saving could be increased every year by paying 15% extra into low-risk investment (e.g. budweiser stock) when the family income increase.
    9.Renter don’t really have to worry about losing life savings on a single investment (house) because he/she bought at foolish time.
  46. 46
    Bubble Lad Says:
    Still, I think there’s a match to be made here: Dave & Krshh (or his/her many aliases) - that’s if, in fact, they are two different people. I see them strolling hand in hand across a wildflower filled meadow mumbling nonsensical opinions, exchanging their own graphs of housing values drawn in crayon. Krsh, aglow with his new friend’s defense of his poor grammar and opinions that make no sesne, has a sort of steampunk universal translator bolted to his chest, out of which sprout a variety of strange non-starters to which Dave nods his head appreciatively, acknowledging the sage wisdom of his new best buddy.
  47. 47
    Thums up2 Says:
    Swirlyman says “1.Renter can live in more desirable place than what he/she could afford to buy.”

    What if your earning is less compare to the rent for desirable place? imagine some one can’t afford to rent a place with $50,000 anual earning but some one bought that same place with $40,000 anual income.
    Q.who can afford to stay on desirable place from the above case?
    A2.at the time of renew total mortgage amount is already low so inflation hardlly can hurt the buyer but renter for sure with 4% estimated anual increase.
    A.3.is depend on the owner and the lease term.
    A4.is same as A3.
    A5.Hpi shows prices most likely go up compare the home price from 1867 to 2008.
    A9.time is always good when you can afford monthly payment for the term.

  48. 48
    richard Says:
    “How many languages do you speak Bubble Lad?

    I don’t understand making fun of somebody’s grammar when it isn’t in their native language. If anything, they should be commended.”

    ha ha ha…. you’re new here so you have no idea at all who you are talking about, and i don’t mean bubble lad. let me just say, you are so so so so so so wrong in this specific instance.

  49. 49
    holgs Says:

    I don’t understand making fun of somebody’s grammar when it isn’t in their native language. If anything, they should be commended.”

    How about when they can’t count? Thums asked:

    Q.who can afford to stay on desirable place from the above case?

    Check out that sweet foreign counting technique! 2, 3, 4 (well, actually 3 again), 5, 9!!!

  50. 50
    Thums up2 Says:
    Holgs,

    On the left over points he is almost right,i can feel the increasing pain in bears because the are thirsty since long time,it’s been almost four year since they are blowing their whistles but horse man did not show up ok let me help them to take a preview.here goes the horse man and his horse http://gallery.bizhat.com/data/504/645horse_car.jpg

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