How high?
The arguments in favour of higher mortgage rates include a couple of old chestnuts: one, that higher rates will cool house prices by making borrowing costs higher and cooling demand, and two, higher borrowing costs will encourage people to retrench and avoid taking on too much debt.
Both points featured in comments Bank of Canada governor Stephen Poloz made in Yellowknife on May 1 regarding Canada’s household debt problem. On average, everyone in Canada owes $1.70 for every dollar of disposable income he or she earns.
“To make the average level of debt so high, it also must include some very highly indebted Canadians,” he observed, going on to say that some households owe more than $3.50 for every dollar available to them. Perhaps more significant, 8% of households with debt account for 20% of the national total.
“In this context, recent changes to mortgage regulations are particularly welcome – including those that require people to show that they can service their debt at higher interest rates,” Poloz said.
Higher mortgage rates have a role to play, too. While not everyone will feel the same impact, variable-rate mortgages being the most affected, Poloz noted that rate hikes since last July have yielded “signs that the growth rate of borrowing has begun to moderate.”
But just how dangerous have high levels of debt proven in B.C.?
While the individual cost is high when debt gets out of control, Canadian Bankers Association statistics indicate that B.C. residents seem to be handling their obligations well.
Indeed, the proportion of mortgages in arrears for more than three months has dropped from a recent peak of 0.49% in the first two months of 2011 to 0.16% in January 2018. Rather than 2,900 mortgages in arrears seven years ago, there are now approximately 1,000.
Déjà vu
A critical part of staying safe on the trail or in the market is being able to understand the conditions you face even if the setting is unfamiliar.
A glance back at this column’s content 10 years ago brings to mind some awfully familiar comments.
“Don’t count on a greater supply of homes to ease the upward pressure on prices,” ran a report on Bob Rennie’s presentation to the Urban Development Institute on May 15, 2008.
Why not? Rising land and construction costs. An influx of foreign money was also tipped as driving up prices in the resale market, though various measures in the past 18 months have helped to limit its role today.
Debt was at its most accessible that month, with 100% financing and 40-year mortgages allowed until Ottawa began tightening the rules in July 2008. The October 2008 financial crisis and the ensuing recession ushered in the heyday of historically low interest rates even as mortgage rules tightened.
Today, a greater supply of homes won’t ease upward pressure on prices because they can’t be approved fast enough and affordable sites are in even shorter supply. With interest rates rising off their historic lows and construction costs also increasing, we’re in a similar place for different reasons.
With civic elections once again looming, Rennie’s advice to developers a decade ago bears repeating.
“Calm down. It’s all going to be all right.”
Sic transit
A reference two weeks ago to Intergulf Development Group’s purchase with China’s Modern Green Development Corp. of the former Oakridge transit centre site drew a tip that Intergulf is no longer a partner in the venture.
Bought in 2016 for $440 million, the 13.8-acre site will be in the hands of Modern Green and asset manager Kunyuan International Group (which enjoyed a lower profile in the original transaction).
The partners haven’t filed applications for the site with the city, but Modern Green says it plans “a significant new community in one of the most livable cities on earth.” It envisions “housing and amenities for everyone from young families to retirees.”
Kunyuan, for its part, says the former transit centre is “intended to be a predominantly residential neighbourhood with a mid-rise form of development.” Redevelopment will include “market and affordable housing, local-serving commercial uses [and] a three-acre city park.” •
