For many decades and a good number of generations now, getting a mortgage on your way to owning a home was something that vast majority of people did almost as a given part of working your way into adulthood. The fact that following a similar path in places like Vancouver and Toronto is quite a daunting prospect nowadays is well understood, but the reality is that it’s fairly daunting no matter where you’re buying a home.
Here at Real Estate Leads, our online real estate lead generation system has really done wonders for new realtors who need to get more out of their client prospecting efforts. Being a knowledgeable and market savvy realtor is a must, but so is the need to be receptive to the way clients will want to really look at the entirety of what will go into their buying a home.
When we look at the new statistics coming out about just what is required to ‘service’ a mortgage, on average, in Canada it is really quite something with the way it forecasts how so many prospective homebuyers would be assuming a punishing financial burden to see their mortgage through to term.
Ain’t Like it Used to Be
Baby boomers will really need to stop saying that buying a home was harder in the 1990s than now. Stats Can numbers now show mortgage debt service ratios (DSRs) at the end of the first quarter of this year have reached levels not seen in more than 26 years. Despite near record low interest rates, the size of loans given for mortgages have pushed the lack of affordability for homes to similar levels. Today this is more of a concern however, as interest rates start to rise and the debt becomes decidedly concentrated.
Mortgage Debt Service Ratio
A mortgage debt service ratio (DSR) is the term given to the amount of gross income dedicated to servicing a mortgage. Understand here that gross means before taxes, so then a good part of the buyer’s income that is not going towards the ratio is now spoken for. Only the principal and interest payments are officially measured here in Canada, and so this means other required payments like property taxes, etc. are not included. Debt service ratios are deceptively low as a result, and especially so when the number comes from the government. Mortgage brokers will of course prefer to advertise those less-than-factual fees.
Debt service levels are very relevant when considering the general outlook of the economy. The more money that goes towards servicing debt, the less money there is for spending on consumer goods and services. And of course the less money floating around your economy, the harder it is for the economy to continue to grow. It’s for this reason that a sudden boom in housing often leads to a slowing of the rest of the economy, and the opposite is also true. When less money is servicing debt then more money is available to push other components of the national or provincial economy.
New Highs
The mortgage debt service ratio (DSR) has this year risen to new highs. The mortgage DSR rose to 6.67% at the end of 2018’s quarter 1, up 6.89% from the last quarter of 2017. Huge jumps like this are seasonal, but the number is still up 1.83% from the same quarter last year. We’re now sitting at the highest ratio since the fourth quarter of 1992, and it’s interesting to note that the 1990s were the last time Canadians showed similar levels of exuberance for real estate.
Distributing Mortgage Debt Is Key
That number may not sound like all that much, but understanding distribution is key to really putting it into perspective. The 6.89% mortgage DSR is split across all households, but that’s not really how it actually breaks down. Census 2016 showed that only 41.2% of households have mortgages. Older households also tend to have higher incomes, along with considerable equity in their homes. By this we can see that younger households are taking the worst of these record DSR levels.
The Bank of Canada issued a caution about the debt concentration just last month. Their estimate is that 8% of households hold more than 20% of all household debt in this country, adding further that these households stand to be at risk in the coming years when rates continue to normalize – as they are expected to. Since we’ve achieved record high mortgage DSRs at record low interest rates, we can certainly expect some serious disruption and more than few wildfires as rates normalize.
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