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It was a good run while it lasted.
With Canadian home prices declining in many markets and mortgage rates pushing up monthly costs for property owners, RBC says “a golden decade for household wealth creation is coming to an end.”
Rock bottom interest rates, population growth and supply shortages in some markets propelled the Canadian housing market to new heights, but a recent report from Statistics Canada indicates household net worth is now declining. Household net worth dropped 2.8 percent to $10.7 trillion in the fourth quarter.
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“To be sure, we don’t expect the scale of Q4’s decline will be repeated. But a slowdown in housing and flatter price trends means real estate values won’t provide the wealth boost they have in recent years.
Canadian households are putting an increasing share of their income towards debt payments, including both principal and interest, following five Bank of Canada hikes (of 25 basis points each) to its policy rate since summer 2017. That brought the rate, which influences the mortgage market, to 1.75 percent, up from a rock-bottom 0.5 percent.
The debt service ratio reflects this changing interest-rate environment. Last quarter, the debt service ratio, which lenders use to vet potential borrowers, reached 14.9 percent, compared to 14 percent in mid-2017, says RBC citing the Statistics Canada release.
RBC anticipates the ratio will inch up further despite the Bank of Canada likely standing on the sidelines this year as a result of a weaker-than-expected performance from the national economy. That’s because as households renew fixed-rate mortgages taken out in previous years, they’ll be facing higher interest rates.
“At this stage, we think the increase in debt servicing costs is more of a headwind to consumer spending than a financial stability risk,” the RBC report states.
Meantime, the debt-to-income ratio soared to an all-time high of 174 percent in Q4, meaning for every dollar of disposable income a household has, they owe $1.74.
“It will take a long period of household incomes outpacing credit growth to deliver meaningful improvement in the debt-to-income ratio. We’re not seeing that yet,” says RBC.