Interest rates, along with the high amount of debt Canadians continue to take on, has been a huge concern surrounding mortgages in Ottawa. But DBRS, a credit rating agency, says that unemployment is more of a concern than either our growing debt, or an interest rate spike.
The agency said that while Canadian households would feel the pinch if housing prices were to drop by 40 per cent, they also say that it’s unemployment that makes people likelier to default on their mortgages. And all that borrowing we’re doing? The DBRS says that it’s our HELOCs and other borrowing methods that are driving up our home prices, and the amount of debt we continue to take on.
In a report that was released yesterday the DBRS said, “A combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations.”
The DBRS continues on to say that when people are working, an interest rate spike could make them feel a tighter pinch at home; but because they are still employed, they will still most likely be able to make their mortgage payments and not default on the loan. However, the same cannot be said for those who are unemployed and therefore, have no income to make their current mortgage payment, even before interest rates rise.
The agency continued on to say in the same report, “If unemployment spikes, many financially stretched households will be forced to sell their homes, putting greater downward pressure on house prices and turning many people into both house poor and cash poor.”
The “cash poor” element is what’s most concerning when referring to the unemployment rate and the DBRS says that when there’s no income coming in, people are vulnerable, even though “Canadian households are solvent, possessing amply home equity and other financial assets. However, day-to-day cash flow appears to be stretched, making households vulnerable to cash-flow shock and credit problems from the occurrence of any of the three Ds – disability, divorce, and dismissal.”
The argument definitely has its merits, especially if many of those households experience job loss after taking on large amounts of HELOC debt and other mortgage debt – the exact thing the federal government and the Bank of Canada have been warning us about over the past year.
Do you think that Canadian households are more at risk from unemployment, or from interest rate spikes?
