One of the largest credit counselling services in the country is issuing cautions about the high level of household debt in Canada. Earlier this year the non-profit Credit Counselling Society reported a 5% increase in calls and a 40% increase in online chats from Canadians looking for help with their debt.
Canadians are collectively carrying more than $2-trillion in debt and more than 70% of that is mortgages. The Credit Counselling Society warns households could become stuck in a debt-trap if the housing market experiences a significant or prolonged cooling. The long period of low interest rates and rising real estate prices we have been experiencing has lulled a lot of people into a false sense of security according to Society president Scott Hannah.
The Bank of Canada has been waving a red flag about high household debt for several years. It cites the record levels as the main domestic threat to the national economy and it is one of the key factors being watched by the Bank as it works to bring interest rates back to normal levels.
There has already been a significant cooling in the Canadian housing market. Interventions by Ottawa and the governments in British Columbia and Ontario have triggered pronounced slowdowns in sales and price growth over the past year or so. The market appears to be stabilizing and returning to more traditional norms though and there is no indication it is on the verge of collapse. Even so, it is worth keeping an eye on some key indicators in case they start to signal problems.
The main influencer of home prices is the cost of borrowing. Predictions of doom are largely based on a rapid 2 or 3 percentage point rise in interest rates. The Bank of Canada has been clear, it is raising rates. It intends to do so gradually due to the uncertainties in the economy. Among those uncertainties is the effect higher rates will have on highly indebted households. That suggests a rapid rise in rates is unlikely.
Interest rate decisions are closely tied to inflation. As Canada’s economy continues to expand the central bank might feel the need to boost rates to control inflation. However, inflation is pretty tame in Canada and within the central bank’s target range. What the BoC wants to see is an economy with a sustained inflation rate of about 2%. U.S. interest rate decisions will also influence the Bank of Canada’s moves and the Americans have also committed to higher, normalized rates.
Inflation tends to react to employment. As the economy expands, more people have jobs. Those people have more money to spend and demand for goods and services increases. As that demand uses up the supply, prices rise and you have inflation. The thing to watch for here is slowing or stalled job growth. Good employment rates signal a good economy. Potential home buyers are more likely to get in to the market if they believe the overall economy is strong and they are not worried about losing their job.
Supply and demand is, of course, the classic indicator of price trends. The less there is of something the more expensive it will likely be. Keep an eye on the longer-term trends in housing starts and in the number of building permits being issued, not just the month-to-month numbers. These signal the mood of the development industry. If the home builders are putting up the money to get projects going, it is a pretty good indication there is demand.