August 6, 2024 | Canada’s Financial Hell Paved with Good Intentions

As interest rates fell from 1980 to 2020, the average Canadian home price increased 746% from $67k to $566k, while the median household income rose about half that rate (400%) from $21,252 in 1980 to $84,000 by 2020 (table courtesy of Nerd Wallet).

The average Canadian home price rose from about 3x the median household income in 1980-2000 to nearly 7x by 2020. Then, pandemic-era policies and frenzied behaviours drove the average Canadian home sale price up a further 44% to $816,712 by February 2022 (nearly 10x the median household income).

As interest rates leapt between 2022 and 2023, the monthly mortgage principal and interest payment on the average-priced Canadian home (with 20% equity or downpayment) rose 87% from $1,910 a month in June 2019 to $3,571 a month by June 2024 (courtesy of Jon Flynn Real Estate).

The Bank of Canada publishes a measure of home affordability in Canada—an estimate of how much disposable income is required to meet housing-related expenses (of which the mortgage is the most significant component). As of September 2023, in the country’s largest population centers, the number was an impossible 98 percent for Vancouver and 80 percent for Toronto.

A recent working paper from the Bank of Canada, Housing Affordability and Parental Income Support, finds that parental support, such as downpayment assistance and co-signing on mortgages, enabled young people to pay about 37% more for homes than they could afford on their own. The road to financial hell was paved with good intentions.

Across Canadian cities, mortgage debt per mortgagor doubled between 1999 and 2019, with the highest debt levels in the most expensive cities. Canadian household debt levels surpassed 180% of disposable income–the highest of the G7 nations.

Many bought or refinanced properties to extract cash for themselves and loved ones when prices were near all-time highs and interest rates near all-time lows. Policymakers and central bankers did everything they could to encourage the frenzy. A good deal of those choices are regrettable now.

About 13% of first-time home buyers (FTHB) had parents co-sign on their mortgages. About one-third of the parent co-signors still had mortgages or Home Equity Lines of Credit on their own homes. Now, debt delinquency rates and financial stress are rising for all parties.

Monthly payments for FTHBs towards housing and other debt take up about 70% of their gross household income, and the Bank of Canada study concludes that “it is very likely that some co-signing parents are also providing ongoing income support for their adult children.”

This nightmare reminds me of prior studies that documented how parental “help” to adult children harms the child’s ability to be financially self-sustaining. (Read The Millionaire Next Door (1996) for more.)

Over 66 % of Canadian homeowners have mortgages today (just over 60% in America).

Considering all these factors, it is unsurprising that in June, the year-over-year growth in Canadian residential mortgages was the weakest since the 2001 recession, 23 years ago (courtesy of the latest CMHC report and chart source).

With higher interest rates and unemployment rising, refinancing is even harder for many struggling to meet obligations. Selling or handing keys back to lenders is becoming the only viable options.

Danielle Park August 6th, 2024

Posted In: Juggling Dynamite

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