Canadians realistic about household debt

In the past decade consumer confidence in Canada was much higher than what would be expected based on certain household fundamentals including Real Disposable Income Growth, Debt-to-Income Ratios and Consumer Capability Indices. It appears that pre-2008, consumers were confident they could increase and manage their household debt when indicators pointed against this.

Then, since the global financial crisis of 2008, Canadian consumers have become more realistic about their debt. Yes, they continue to borrow; however, the pace of that borrowing has slowed down. This change in mindset is happening during a time when their capacity to manage their debt has increased.

A recent report by economist Benjamin Tal of CIBC, analyzed this new trend on seven household fundamentals. He found that as of the second quarter of 2011, the Consumer Capability Index was back to the level seen before 2008, with the gap between confidence and capability narrowing notably, relative to the wide gap seen during most of the decade. This improvement in the capability index was not due to a strong growth in income but reflects the fact that while the level of the debt-to-income ratio is still rising, the speed at which it is, in fact, slowing.

"The key here", Tal wrote, "is the notable softening in the pace of growth in personal non-mortgage credit which is currently expanding at the slowest pace since the early 1990s. In fact, the ratio of consumer credit to disposable income has been stable over the past year."

According to the report, other factors contributing to the recent improvements include:

1. A higher savings rate which, while easing lately, is still double the rate seen before 2008
2. Personal bankruptcies are down
3. Relatively low and stable debt service costs
4.  A stabilizing long-term unemployment rate at a relatively low level

"While consumers will continue to take advantage of historically low borrowing costs," Tal said. "The practical implication of their more realistic approach is that spending in the near future will be slower but more balanced growth as it will be based on fundamentals as opposed to wishful thinking."


-Debbie Thomas TMG The Mortgage Group Canada Inc.


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Average resale home prices rise 6.5%

"A September surge in home buying helped boost the number of Canadian homes sold in the first nine months of this year an unexpected 1.2 per cent compared to the same period last year, according to figures compiled by the Canadian Real Estate Association.

Sales of existing homes rose 2.7 per cent in September compared with August, according to a monthly report released Monday by CREA. On a year-over-year basis, home sales in September were up 11 per cent from the same month in 2010.

The strong September activity drove the number of homes sold on CREA's multiple listing service in the first nine months of 2011 to 361,749.

The increase over last year was surprising given that many economists and industry watchers, including CREA, had earlier predicted that sales this year would decline over the same time in 2010.

TD economist Sonya Gulati said she expects a “tug of war” between several factors — including low interest rates and waning consumer confidence — to take hold in the coming months, leaving conditions fairly balanced, with sales and prices holding steady at current levels over the next year.

“Several factors appear to have clipped the wings on resale activity this year, including: (1) new mortgage eligibility rules; (2) a wave of economic uncertainty emerging in recent months; and (3) a growing saturation of the first-time home buyer category,” she said.

“Helping cushion the impact of these negative forces has been the persistence of low mortgage rates. “

Sales have remained stronger and for longer than expected largely because the period of ultra-low interest rates has been extended beyond earlier expectations due to an uncertain global economic outlook. The Bank of Canada's overnight lending rate currently sits at 1 per cent.

Low interest rates impact variable mortgages and other loans tied to a bank's prime rates, and have encouraged many, especially first-time buyers and those who might not otherwise afford ownership, to enter the market.

The Bank of Canada dropped rates to an emergency low 0.25 per cent during the recession of 2009 to encourage Canadians to spend on big purchases like houses.

Buyers entered the market in droves during the latter half of 2009 and early part of 2010, driving prices higher as some — encouraged by low lending rates — engaged in bidding wars to secure a home while rates were low.

That drove prices to record levels that some economists have predicted are not sustainable. Others have said a drastic drop could be on the way.

The national average price for a resale home made its smallest year-over-year increase since January, rising to $352,600 — up 6.5 per cent from September a year earlier.

That's down from as much as 9.3 per cent year-over-year increases posted in July, noted Bank of Montreal economist Robert Kavcic.

The upward pressure on prices from high-end sales in the expensive Vancouver and Toronto markets appears to be receding, he added.

“Note that sales in formerly white-hot Vancouver are now just two per cent above year-ago levels compared to nearly 30 per cent year-over-year in the spring, and average prices have come off the boil in recent months, though they're still up 10.5 per cent year-over-year.”

“Meantime, Toronto (and most of Ontario for that matter) is now seeing sales growth at a heated 21.3 per cent year-over-year pace, but that compares to a depressed period last summer.”

The September increase in activity reflects strengthened activity in a number of major markets, led by Toronto, CREA said.

The number of newly listed homes nationally was little changed in September from the previous two months and more that two-thirds of markets were in balanced territory.

New listings were up from the previous month in a number of major markets including Toronto, Montreal, Ottawa, Oakville and Vancouver, but declined in Edmonton and British Columbia's Fraser Valley.

The national sales-to-new listings ratio, a measure of supply and demand, stood at 52.8 per cent in September, up from 51.6 per cent in August.

“Canada's housing market remains stable amid continuing financial market volatility, contributing to Canadians' confidence in the economy and providing support for Canadian economic growth,” said Gregory Klump, CREA's chief economist.

“Interest rates are expected to remain low for longer, and evidence suggests that recent changes to mortgage regulations are preventing the kind of excesses they were designed to avert. Both of these developments are good news for the housing market.”

Economists have predicted interest rates will remain on hold until 2013. However, Mr. Kavcic said he believes sales and prices will fall somewhat next year.

“Canadian housing continues to look balanced and healthy, as low mortgage rates and a falling jobless rate are offsetting weaker consumer confidence and tighter mortgage rules,”he said.

“We continue to expect sales and prices to cool in the year ahead, but the landing should be a soft one.”

SUNNY FREEMAN

Ottawa— The Canadian Press

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