I read an article from Reuters which I found to be of interest and as a result am sharing it with you today.
With interest rates at record lows, a Canadian housing market that has not seen a correction in sixteen years, a soft employment market, and a weakened energy sector which has placed Canada into a “technical recession” which by definition is two consecutive negative quarters of output, what does this mean for those households with residential mortgages? Canadian household debt is at its highest point on record with no signs of slowing. As a ratio compared to American household debt prior to their housing meltdown, the Canadian figure is higher!
I enclose an article from Reuters for your review:
http://in.reuters.com/article/2015/10/06/canada-economy-housing-idINL1N1261FD20151006
The topic is about mortgage affordability and what would happen with an increase in interest rates. I was surprised to read only 9% of Canadians would not have an affordability issue if their payment increased by $500/month. This is quite low and to provide a “real-example” of what this increase entails, below is an example of a calculation:
Current Mortgage Assumption
$500,000
3% – 25 year amortization
$2,366/month
*If rates increased to 4% (33% increase or $264/month)
$2,630/month
*If rates increased to 4.5% (50% increase or $401/month)
$2,767/month
*If rates increased to 5% (67% increase or $542/month)
$2,908/month
Based on my calculations, a $500/month increase for a $500,000 mortgage represents an interest rate increase of 67% (from 3% to 5%) which is not realistic in my view given the headwinds for the Canadian economy, employment picture, and housing market. That said, even if rates rise slightly and affordability is still possible, one needs to consider their employment stability for the long-term. Consider the darling province of Alberta, prior to the collapse of Oil prices they had one of the lowest unemployment rates in Canada and as a Province they were running a surplus. Today it is very different, with energy companies scrambling to keep their organizations profitable the jobs cuts are in the tens of thousands, and their Capex spending is being slashed. In short, one’s employment security can change in any given moment and households need to keep this possibility in mind for their personal financial plans.
The key takeaways are rates need to increase meaningfully before signs of strain are visible yet one needs to consider other variables for their mortgage planning. Feel free to share this information if you deem necessary.