In a recent research paper published by the Canada Mortgage and Housing Corporation (CMHC), economist Aled ab Iorwerth found that Canada’s “very high levels of household debt — the highest in the G7 — makes the economy vulnerable to any global economic crisis.”

Save with SPP spoke to ab Iorwerth, who is CMHC’s Deputy Chief Economist, by telephone recently.

His paper notes that household debt in Canada “stood at about 80 per cent of the size of the economy” in 2008, rose to 95 per cent by 2010, and as of 2021 stands at 107 per cent of the nation’s gross domestic product.

That high level of debt, his paper notes, will “do most damage when a significantly negative external economic event happens — such as a global economic crisis – which leads to widespread job losses, as discussed above. It becomes difficult, if not impossible, for many mortgage holders to service their debt.”

Should we see any sort of economic turndown that leads to job losses, carrying high levels of debt into a time when unemployment is higher will “make any recession more severe,” his paper predicts.

We asked him if housing costs were one of the leading factors in the high levels of household debt here.

“I think so,” he replied, noting that mortgages represent “three quarters of that debt.” The rest, he explained, comes from credit cards and other forms of debt. This high level of indebtedness, he says, is nothing new — it is a “long-term trend” in Canada.

He added that high housing prices (which lead to large mortgages) are a particular problem “in big cities like Vancouver, Toronto, Montreal, and even Ottawa. It is a real issue in big cities.”

We asked if high levels of household debt restrict, or limit, the ability of people to save for long-term goals like retirement.

ab Iorwerth says that while he generally agrees with that statement, it gets complicated when you consider that housing is a type of debt (through a mortgage) but “also a form of savings,” since when the mortgage is discharged, you have an asset that is worth something.

“There are risks involved in saving through housing,” he adds, pointing to what happened in 2008-09 with the collapse of world’s credit markets. And he says households “tie up so much money in housing” that it does have a restrictive impact on other forms of saving.

We then asked for his thoughts on inflation’s impacts on lower-income Canadians.

There are a lot of impacts, he says, and again, some subtleties. For lower-income families, he explains, we are usually talking about rental payments rather than mortgage payments. But rental rates tend to go up in times of inflation. “If someone was living in a rent-controlled apartment, if they are looking to move, they will be facing a sharp jump in rental rates,” he says.

At the grocery store, inflation’s impacts “are felt more keenly.”

Overall, however, ab Iorwerth says “the situation is not good in the rental system — you are going to see a really big jump in rents.”

Asked if there is any sort of step governments could take to help with the country’s housing situation, ab Iorwerth says it has long been CMHC’s position that Canada needs “a dramatic increase in housing supply, right across the board.” More housing is needed not only for lower-income Canadians, but for the middle class as well, he explained.

“We need more apartments, more rental properties — more supply right across the board,” he adds.

Longer term, his research paper notes, “re-establishing housing affordability in Canada will be key to reducing household debt if (more Canadians) want to become homeowners.”

Asked what he found most surprising in his latest research, ab Iorwerth says it was really looking at “the international picture” and noting that Canada’s household debt was second only to Australia’s.

By contrast, his paper notes, the U.S. level of household debt was at 100 per cent of GDP in 2008 but has since dropped to 75 per cent as of 2021. Over the same time period, the paper notes, the U.K.’s level of debt versus GDP went from 96 per cent to 86 per cent.

We thank Aled ab Iorwerth for taking the time to speak with us.

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If you buy a house or re-finance your existing home beginning in 2018, you may need a higher income to qualify for a mortgage.  Borrowers who are renewing mortgages will not have to meet the new stress-test standard as long as they stay with the same bank. However, renewals done with another lender will have to qualify under the revised standards because they require new underwriting.

As Sean Cooper explains in What OSFI’s (Office of the Superintendent of Financial Institutions) Tightened Rules on Uninsured Mortgages Means for Homebuyers on RateSupermarket.ca, under these new rules, buyers with a 20% down payment or more will have to undergo a more rigorous stress test, and qualify based on the highest posted five-year fixed rate – 4.64%, roughly 200 basis points higher than actual mortgage rates.

“Last year, in an effort to cool down hot real estate markets in cities like Toronto and Vancouver, Ottawa introduced new mortgage rules on only insured mortgages – meaning those who put less than 20% down.” Cooper notes. “But since then, the uninsured mortgage market has grown. So, to help reign in this segment of the market, OSFI is now proposing extending the stress test to uninsured mortgages.”

Lowestrates.ca blogger Alexandra Bosanac further clarifies in This is how OSFI’s new mortgage rules will affect Canadian homebuyers that the new OSFI rules will apply to buyers who apply for uninsured mortgages including those with a 20% down payment or more and those buying homes worth $1 million or more. “They will be stress tested to show they can afford a mortgage, either at the five-year average posted rate, or two percentage points higher than the rate their bank or broker offers them (whichever one is higher),” she says.

Bosanac offers an interesting example of how the new rule changes will impact homebuyers. A couple buying a home for $500,000 with a $125,000 down payment would be paying $1,743 a month at the the current lowest variable five-year mortgage rate in mid-October available in Ontario of 1.99%. However, under the new rules, that same couple will be stress tested prior to qualifying to ensure they can pay the mortgage at two percentage points higher — 3.99%. That means they will have to be able to show they can afford to pay a mortgage of $2,165 a month. That’s a difference of $422 a month, or $5,064 a year.

Globe and Mail mortgage columnist Robert McLister offers 10 ways the new mortgage rules will shake up the lending market. He suggests  that unless provincial regulators follow OSFI’s lead (which if history is a guide they won’t), it will be a bonanza for some credit unions because many credit unions will still let you get a mortgage based on your actual (contract) rate, instead of the much higher stress-test rate. He expects to see a rush of buying before the end of the year from people who fear they won’t qualify after January 1.

Furthermore, critics say new mortgage rules will push borrowers to unregulated lenders according to Globe and Mail reporters Janet McFarland and James Bradshaw. They spoke with OSFI superintendent Jeremy Rudin who acknowledged that OSFI is offloading risk to the unregulated lending sector, which doesn’t come under federal control, “That would not be an intended consequence, nor would it be a completely unanticipated consequence,” he told reporters.

Former MP Garth Turner blogging at The Greater Fool anticipates that real estate values will decline across the country as a result of the changes, which means home purchases could be a potential wealth trap, particularly for first time buyers who cannot afford losses.

In After Mom, he notes that in order to avoid paying mortgage insurance, many young buyers borrowed from parents to get over the 20% line so they would not have to pay mortgage insurance. As a result CMHC-insured loans plunged more than 40% at the same time real estate activity rose, the number of borrowers increased and overall mortgage debt swelled.

He concludes, “The average down payment gift from parents to kids in households making $100,000 or more is now over $40,000. Let’s hope Mom has a bunch more money to bail junior out when prices fall, rates rise and that first loan renewal comes round. Stress, baby.”

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Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

By Sheryl Smolkin

The Canadian dream for many is to find a partner, get married, buy a house and have kids –- not necessarily in that order. With the average house price in June 2015 climbing to $639,000 in Toronto and $922,000 in Vancouver, many young people have been shut out of the housing market.

However, Saskatchewan residents are more fortunate, with the average provincial house price sitting at $303,000 province-wide and $316,000 in Regina. But if you or a family member are thinking about leaving the world of rentals behind and buying your first home, it’s still important to factor in all of the costs you will incur, and the impact possible interest rate increases will have on your monthly payments.

Here are 5 questions you should answer before you decide to leap into the housing market:

1. How big is your down payment? While it is possible to buy a home with as little as 5% down, if your deposit is less than 20% of the purchase price your mortgage must be insured by a third party such as the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada or Canada Guaranty. The insurance premium will range from 0.5% and 2.75% of your total mortgage amount and add significantly to the cost of your home over time.
2. How much house can you afford? Mortgage experts suggest no more than 32% of household income be spent on housing costs. The Mortgage Payment Calculator on ratehub.ca will allow you to model how much your monthly payments will be depending on the amount of your deposit, the term of the mortgage, interest rate and any mortgage insurance. So if you buy a house for $350,000 with 5% down, a 5-year mortgage amortized over 25 years at a fixed rate of 2.69%, your payments will be $1,576/month. In addition, you must factor in municipal taxes, utilities and annual maintenance costs. In contrast, over the past year, rent for a two-bedroom apartment in Regina ranged from $884 to $1,395.
3. Is your job secure? Taking on a mortgage is a long-term commitment. If you are basing your ability to pay for your home on your current family income, consider whether or not you and your spouse have secure jobs. Could you afford to continue paying monthly house expenses if one of you lost your job? How long would it likely take get a new job if one of you were downsized?
4. What are your family plans? If the next major milestone after buying a house is to start a family, that means that at least one parent may be out of the workforce for up to a year after the birth of each child. Are one or both of you eligible for EI maternity and parental leave benefits? Do either of your employers top up EI benefits to all or part of your full salary for some period of time? If not, how will you make up the difference? When both of you go back to work, will you be able to afford daycare costs on top of your mortgage payments?
5. What if interest rates go up? Mortgage rates are at historic lows. According to ratehub.ca if you have a down payment of 20% your mortgage rate (calculated on August 17/15) you may pay as high as 2.69% for a 5-year fixed rate in Regina or as low as 1.85% for a variable rate in the same city. What if interest rates doubled or tripled? Could you still afford your mortgage payments plus all of your other family commitments?

The advantages of renting are that your costs are fixed for the term of the lease; you are not responsible for the cost of major repairs; and, if you want to leave the neighbourhood or move to another city you have much more flexibility.

While you are not purchasing an asset that will increase in value that you can cash in when you are ready to retire, if you save and invest the difference between your annual rent and the costs of running your home, you will have a nice little nest egg by age 65.But few people have the discipline to do so. And most rental properties cannot be customized or decorated to your own personal taste.

So all things considered, the decision to rent or buy may be as much an emotional decision as an economic one. Each individual or family will make a unique decision based on their stage of life, their finances and their personal priorities.

Also read:
Cheap mortgage rates don’t justify home ownership

By Sheryl Smolkin

Buying a home is probably the most significant purchase most people make in their lifetime.  Whether you are buying your first house or you are a seasoned homeowner, it is important to understand your legal rights and obligations.

Buying and Selling a Home by The Public Legal Education Association of Saskatchewan (PLEA) and Buying or Selling Real Estate in Saskatchewan written by lawyer Kevin Rogers for The Lawyers Weekly are both excellent resources.

PLEA suggests that you keep the following 10 things in mind before you go house hunting.

1. What can you afford? Generally mortgage lenders suggest that the cost of your mortgage payments, property taxes, heating and condo fees (if applicable), make up no more than 32% of your household’s monthly income before taxes. Lending institutions generally look at keeping total debt payments below 40% of a household’s gross income.
2. Mortgage costs: It’s usually a good idea to shop for financing before you start house hunting to determine the maximum amount of money you can borrow and discuss payment schedules. Your lending institution may commit to a certain size of mortgage at a set interest rate. This is called a pre-approved mortgage and it will help you determine your price range.
3. Down payment: Generally speaking, you will have to come up with a down payment of at least 20% of the purchase price to qualify for a mortgage. However, if you can obtain mortgage loan insurance through government programs such as Canada Mortgage and Housing Corporation (CMHC), or private mortgage insurers you may be able to obtain a mortgage with as little as a 5% down payment. Some restrictions apply.
4. Ongoing Costs: In addition to mortgage payments you should budget for annual property taxes plus heating water and electricity bills. Therefore, the energy efficiency of the home may be one thing to keep in mind when you are considering properties. You may also have to buy furniture, appliances, window coverings and tools to do repairs and maintenance work.
5. Closing costs: Closing costs are additional expenses that must be paid before the purchase is complete. Generally, buyers should budget 1.5% to 4.5% of the purchase price for these costs. Some of the closing costs include legal fees, including disbursements; pro-rated property taxes for the portion of the year the vendor paid for when you will be the owner; the GST for new homes or homes that have been substantially renovated or re-located; property insurance; mortgage life insurance; and, utility deposits and hook up charges.
6. Real estate agent vs private sale: Generally speaking real estate commission is paid by the seller and free to the buyer. The advantage of using an agent is he/she can show you all of the suitable listed properties in your price range and preferred area. However, you can buy property directly from a seller and the price may reflect the fact that the seller does not have to pay a commission. But if you do purchase a home privately, have a lawyer review or draft the offer or any other documents to ensure that they are legally sound and contain only the terms you have agreed to.
7. Caveat emptor: Generally when buying a home, the rule is “buyer beware.” Check out the home carefully and make the offer conditional on a home inspection. However, the seller must tell you about any defects he is aware of that could not be discovered by a reasonable inspection of the property. Things like past problems with water in the basement, windows that leak when it rains or faulty plumbing would likely be included in this category if the seller knows about the problem.
8. Farmland or other non-residential property: Each type of purchase involves its own unique considerations. If you are considering the purchase of farmland, acreages, commercial, recreational or rental property, there may be additional things to find out about the property before making an offer to purchase. You should seek advice from a real estate agent or a lawyer to ensure that all the relevant factors are adequately considered.
9. Building /renovating: If you are planning to purchase land where you can build a home, have the land inspected to ensure that it is suitable for the type of construction planned. Whether considering new construction or major renovations, it is important to find out if there are any municipal bylaws that may limit building plans. Whether you will be doing all or part of the work or using contractors, it is important to seek legal advice before signing contracts for materials or services.
10. Condominiums: Condominiums are typically made up of individually owned units and common areas used by all the owners, as well as common areas that are set aside for the exclusive use of particular units (such as dedicated parking spaces). The cost of maintaining these common areas comes out of the condo fees all owners pay. The fund for major repairs is called the Reserve Fund. Satisfy yourself as to the state of repairs of common areas and the health of the Reserve Fund. Otherwise you may be in for a nasty surprise when you have to pay an unexpected levy of thousands of dollars.

Also read: Owning a home in Saskatchewan became more affordable in Q4 2014, RBC Economics