Published On: Monday, 12 June 2017

House Rich, or House Poor? Evaluating Canadian Homeowner Behaviour

House Rich, or House Poor? Evaluating Canadian Homeowner Behaviour

- The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies through research that is nonpartisan, evidence-based and subject to definitive expert review.

CANADA - House rich, big-spending Canadians are taking a gamble on the risk of an economic shock in Canada, according to a new report from the C.D. Howe Institute.

In "Spendthrifts and Savers: Are Canadians Acting Like they are “House Poor” or “House Rich”?", author Jeremy Kronick finds Canadian household spending, apart from housing, has not dropped despite consumers taking on more housing debt and draws lessons for policymakers concerned about a hard landing.

The author finds that, using the mortgage debt-servicing ratio—an affordability measure that looks at how much households have to pay out of their disposable income on a monthly basis to cover mortgage payments—Canadian monthly mortgage bills have remained virtually unchanged between 1990 and 2016.

However, the author notes that this measurement masks the debt’s composition between interest costs and principal, and shows that the former has dropped significantly while the latter has filled the gap. In other words, households are more leveraged and therefore more vulnerable.

Somewhat surprisingly, his analysis shows that Canadians have not slowed non-housing spending due to this riskier debt composition, and they have spent out of accumulated housing wealth.

“Simply put, Canadian mortgage bills have remained flat, the principal portion of those bills has grown substantially, but households are not scrimping in other areas of spending to account for this increased risk,” says Kronick. “Interestingly, contrary to common assumptions, rising interest rates that would cause mortgage debt servicing to increase would not result in drops to non-housing spending.”

The implication is clear: the risk to the economy is less about rising interest rates that increase total mortgage costs, and more about a negative economic shock that will be exacerbated by higher leverage debt and housing wealth that may not be there to compensate.

The author provides the following recommendations to policymakers:

  1. The Bank of Canada can use these results to help model the economy now and into the future given current debt dynamics. Being prepared for a potentially larger consumption impact from a negative economic shock is prudent; and
  2. Governments at all levels should continue to monitor the effectiveness of their demand-side policies while considering what supply-side policies may be more appropriate in slowing down housing prices and cheap credit growth, thereby lowering debt loads. Options for the government to consider include the balancing of environmental concerns with housing supply growth, pricing the use of infrastructure, and making the application process for development more efficient and transparent.