A new report from McKinsey Global Institute is warning that household debt levels are dangerously high in many developed countries, including Canada.
The report calls for more action to reign in both household and government debt and to cool overheated housing markets.
“We have to take note when a study compares us to Greece,” said Chris Catliff, president and CEO of BlueShore Financial Credit Union, referring to a measure included in the report showing that the rate of Canada’s increase in debt-to-income has been second only to Greece from 2007 to 2014.
The Bank of Canada’s recent decision to cut interest rates from 1% to 0.75% is designed to spur economic activity in the wake of plummeting oil prices, which is expected to slow the country’s economy this year.
But there is a danger the bank’s decision could create the potential for an asset bubble, Catliff said. According to the Bank of Montreal, British Columbia residents currently carry the second highest debt in the country, behind Alberta.
“In general, we are seeing debt to income in Canada has gone up to a certain level and then it’s plateaued and come down,” he said. “But with interest rates dropping it could easily [go up again].”
Catliff described a set of linked trends he thinks would prevent Vancouver’s real estate market from crashing in the event of a financial downturn. BlueShore Financial is based in North Vancouver and specializes in a high-net-worth demographic.
Wealthy immigrants from other parts of the world, such as China, the Middle East, Europe and the United States, continue to buy homes in Vancouver, he said. These wealthy people often do not show income in Canada, and Catliff believes this slightly skews debt-to-income measures for Vancouver.
“We also see them holding significant cash resources on the sidelines or investments,” he said. “What that means is that the mortgages are not at risk because they have these outside availability of cash or resources if they need it.”
Vancouver’s real estate market might be in trouble if those wealthy immigrants were to stop coming to Vancouver and parking their money in houses.
“We would be significantly hurt by it if it happened for a long period of time, but what you see in other jurisdictions is, they may stop coming, but will they sell?” he said. “Because they may stop coming, but this is their haven that they’ve put outside investment, outside of their country.
“The house might be empty but it doesn’t mean it’s going to be sold.”
The dramatic rise in detached home prices in Vancouver compared to townhouses and condos has been spurred by this wealthy immigrant trend, Catliff said. That has provided existing detached home owners with soaring equity. That’s led to many home owners who are 55 or over taking on more debt, as they use that equity to help their children or grandchildren buy homes.
“The desire of parents is often to get their children and grandchildren into [detached home] neighbourhoods, with grade schools, and near them,” he said.
Taking out a second mortgage or co-signing on a loan are common ways parents who own property in Metro Vancouver help their children buy into the region’s traditional detached home neighbourhoods, which have become increasingly out of reach for the average home buyer.
Catliff said his credit union sees older home owners interested in helping their children buy a home on a daily basis.
However, Catliff would advise first-time home buyers to purchase a starter home first, which in the Vancouver area would likely be a condo.
“It allows you to build up your equity and pay down your mortgage,” Catliff said.
“In Canada it’s really a gift from the government that allows us to use rent money to pay down a mortgage and to get a tax-free capital gain at the end.”