Monday, April 30, 2012

Canada's Mortgage Stress Test - How Nervous Are Canadians?

Over the past few months, I have posted several items on Canada's overheated housing markets and stratospheric levels of household debt.  While those with common sense realize that eventually interest rates will go up and housing values will drop, one has to wonder just how confident Canadian homeowners are about their ability to sustain their monthly payments in the face of rising mortgage rates.  Fortunately, Canada's Bank of Montreal (BMO) recently surveyed 1500 Canadian homeowners asking that very question in their Homeownership Stress-Test Report.

First, let's look at how low five year fixed mortgage rates in Canada really are today when compared to historical values back two generations to 1951 in this chart from the Bank of Canada website:

Here is the same data in graph form from 1975 to the present showing that we really are living in an interest rate dreamworld:

According to the BMO survey, the majority (57 percent) of Canadian households are quite confident that they would be able to service their mortgages if interest rates rose by two percentage points.  That said, 20 percent of Canadian households indicated that the same two percentage point rise in mortgage rates would hamper their ability to afford their home.  The final 23 percent of the surveyed households indicated that they were uncertain whether a two percentage point rise in interest rates would impact their ability to afford their homes.

The question of affordability under a rising interest rate scenario also seemed to be different along gender lines.  Only 37 percent of men claimed that they would be unable to afford their homes in a rising interest rate scenario whereas nearly half of women (49 percent) stated that they would have trouble affording their mortgage payments under the same interest rate scenario.

Homeowners’ perception of mortgage stress also varied with location in Canada as shown on this chart:

Albertans were most certain that they could afford their homes if interest rates went up 2 percentage points at 73 percent and were least concerned about losing their home at only 13 percent.  British Columbia residents were least certain that they could afford their homes with only 48 percent being certain that they could afford a two percentage point rise in rates and a rather frightening 32 percent being certain that they could not.  That is a particularly frightening statistic given that Vancouver has, by a wide margin, the least affordable real estate in Canada when median price is measured in terms of median household income.

Here is a graph showing what has happened to average real estate prices across several major markets in Canada over the past 11 years:

It is quite apparent that prices have risen well beyond what is comfortable for most households, especially given that total household income has risen only modestly.  According to Statistics Canada, median total household income across Canada rose from $60,600 in 2005 to $68,410 in 2009, an increase of 12.9 percent over the five year period.  Over the same time frame, an average house in Canada rose from $230,000 to a peak of $320,000, an increase of 39 percent as shown on this graph from CREAstats:

Clearly, prices for residential property have outstripped growth in household income, resulting in decreasing affordability, particularly in certain markets.  Canada's real estate market could be in dire straits if the 20 percent of Canadians that cannot afford a measly two percentage point increase in mortgage rates are forced to sell their homes, flooding the country's least affordable markets with a surplus of for sale real estate.  Having seen Calgary's market flooded with unaffordable homes in the early 1980s, it was rather stunning to see how quickly prices dropped by one-third or more.  This time, it could be far worse and far more painful as Canadian "homeowners" find themselves owning more mortgage than they do property.


  1. Posted this to Facebook, so my kids and their friends will see it. Thanks. Regina and Saskatoon prices are not at Vancouver levels but are certainly far higher than 5 years ago.

  2. Interesting. A few points: a) according to CBA data Alberta has the worst rate of mortgage arrears in the country and has had for some time. I'm not sure how that squares with the BMO survey showing such optimism there; b) Vancouver numbers are outrageous and really should be stripped out of national numbers to get a true perspective on the country; possibly Toronto's too; if you get outside of these two centers, most communities have not experienced anywhere near the imbalance suggested by the national numbers; c) in the GTA at least and likely most of southern Ontario new single detached homes are being built at the lowest level in at least a generation while condo construction is crazy; for many people in the GTA a home is now a condo; in so much as these are different markets, they may have different destinies - a condo glut forcing down the price of all condos and near substitute products like rental apartments and townhouses, while the tight supply of single detached homes, especially newer houses leads to growing prices there.

  3. Driving into Toronto these days, seeing dozens of new tower blocks being crammed into the downtown area, it is hard to imagine this is going to end well. There are a lot of BIG mortgages out there. A return to the historical norm for interest rates would be a killer blow to many homeowners. A meltdown in Toronto and Vancouver real estate markets would have a ripple effect across the entire economy. This at a time when the band-aids on the eurozone crisis are starting to look frayed in light of recent election results and the US recovery continues to sputter.

  4. I am glad that I just sold two weeks ago for a $60,000loss including real estate commissions. I am going to a more affordable town (Abbotsford where I purchased a suite larger and gorgeous and only two minutes to the border for better shopping. The suite was $40,000 less than I sold for so it will be good!

  5. Carney cannot raise the rates very far. If he goes to far, the political pressure to hold the line will be immense. (yes - the BoC policy is supposed to be independent of political pressure, but lets see what REALLY happens when people start to not be able to afford their mortgage payments) And yes, VanCity and TO should be excluded from national statistics. They are NOT representative of the market as a whole. They are most definately in a bubble situation. Sucks to be them! Low interest rates are here to stay, at least a lower norm than we have seen in the past. All of the wiggle room has been sucked out of the market. No chance of sustaining higher rates any more. Sorry to all the savers out there, but that's the cold hard reality.

  6. I Just came back from Orlando, Florida to see Disney etc.

    Rented a house with a pool for two weeks for $130/night all in. Houses were going for $400,000 mark about at the peak. Now going for $120,000.



  7. Thanks for share about Mental Health. I want to share more information about stress test. I am sure you will be get more knowledge about stress test. I am giving the information from stress test. Stress test is very important part of doing a business. you can get the information about stress test from Mental Health group:

  8. There are also several people that get stress on mortgage especially when the mortgage rates in purchasing a house increase.

  9. Thousands of "experts" said there was no bubble in the USA....then POP.
    Thousands of "experts" are saying there is no bubble in Canada.
    If you dig, you will see that most of the experts saying there is no bubble in Canada were also saying there was no bubble in the USA, or England or Ireland.
    Obviously, the criteria to be called "expert" is in need of an adjustment.