Massive drop in housing prices would still leave Canadian households with more equity than debt

A new report out Tuesday suggests rising home values have pushed Canadians to a record level of net worth relative to their disposable income.

DBRS, a ratings agency, said in its third quarter report out Tuesday that the average Canadian household had a net worth of $726,000 which includes $263,000 in home equity. The numbers are based on Sept. 30, 2016 data. The company said that net worth as a percentage of disposable income had reached a high of 843 per cent in the third quarter, based on data that goes back to 1990.

The average household had 74 per cent equity thanks to steady property appreciation. DBRS says rapid depreciation of the Canadian dollar against the U.S. dollar in the second half of 2015 was a “significant driver” in the spike of the number of homes sold in metropolitan markets in Vancouver and Toronto.

“(That’s) consistently above U.S. equity ratios by six per cent to 15 per cent before the U.S. housing market crash started in 2007,” according to the 19-page report.

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The ratings agency says even if the market crashed 20 per cent to 40 per cent, Canadian household equity ratios would only decrease to 67.5 per cent and 56.7 per cent respectively.

On the debt front, which reached a new record in the last quarter according to Statistics Canada, the amount of household disposable debt allocated to service mortgages was 6.1 per cent in the third quarter — a percentage that has been relatively stable since 2005.

“In contrast, the amount of disposable income allocated towards interest payments have continuously decreased, standing at a low of 3.1 per cent in (the third quarter of 2016),” DBRS said, noting increasing amounts of mortgage payments are being applied to amortization and principal.

The company does note that a two percentage point increase in the five-year posted rate would raise gross debt service ratios significantly. The GDSR — mortgage payments, property taxes, heating costs and condo fees divided by annual income — would climb from 44 per cent to 50 per cent for the average household with a conventional mortgage under that 200 basis point increase. For people with insured mortgages backed by Ottawa, that increase would would push their GDSR to 58 per cent from 50 per cent.

DBRS noted that in July, 2012 the federal government implemented a cap of 39 per cent of a household’s monthly income. CMHC says homebuyers with CMHC-insured mortgages had an average GDSR of 23.7 as of Sept 30, 2016.

“If home prices continue to go up, fewer and fewer families will be able to qualify for an insured mortgage,” the company concluded.

Financial Post

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