Long gone are the days that Canadians are know for their conservative ways, low debt levels, and high rates of savings. This is part generational, but more so due to the changes to a relaxed lending system in Canada. These changes are allowing Canadians to borrow more and treat the equity in their home like a bank machine to purchase anything they see fit. Take a look at this parody before you read any further.
I know at the end of the video it takes a bit of a twist and ties in future debts issues of the US and what future generations will have to deal with. Putting this issue and the last 44 seconds of the video aside, the parody is not far fetched what has been happening in Canada today. If this in any way resembles your own circumstances I’m going to strongly suggest you make real changes to your spending habits now.
The amount of equity that has been created in a person’s home over the last decade or so is unprecedented. As much as this has been great for those that have benefitted, it has also changed the way many people handle their finances. The exploding value of a person’s home and the easy access to capital in these homes are causing people to spend, and spend a lot. The household debt to income ratio has exploded from 104% in 2001 to new record levels of around 167%, with a forecast of 180% in 2018.
In my view the continuous rise in real estate prices are making people feel rich. I get it, for a lot of people living in Vancouver they have made more money in their house than they will probably make for the rest of their working lives. The people I am most concerned about are those that keep taking money out of their home, mainly because they believe the value will just keep going up. Now I’m not hear to make a call on what is going to happen next to the housing market as those in the investment industry know how the saying goes ”the market can stay irrational longer than I can stay solvent”. I do feel that people should start looking for the signs that the party may be over, or at least planning for when that day might happen.
Lets look at the current environment. Income has not even come close to keeping pace to housing prices. This is very important because when the average person cannot afford a home, what does this mean to an economy or future sales of homes. Interest rates have finally moved. It took 7yrs but the bank of Canada has increased interest rates .25% and I expect at least 1 more rate hike in 2017 to undo the .5% interest rate cut in 2015. Look at the bank of Canada’s comments and judge for yourself. Read here. Simply put rising interest rates make owning a home more expensive. Also as interest rates go up, it reduces the amount a person can borrow to buy a home.
Again, I’m not hear to argue what is going to happen to real estate prices, but I want to caution those using their home as a cash machine, the time to stop is now. Let’s just consider the following; what if housing prices do not rise over the next 5 years, how will that affect you. Let’s also take a moment and consider what may happen to your finances if interests rate go up a .25% in the next few months, .5% in the next year, or 1% in the next 2 years. Are you prepared?