Just when we thought we had all agreed that a slight increase in interest rates could help to cool Canada’s hot housing market, two experts are weighing in to say that a hike could actually hurt our economy more than help it.
According to Derek Holt and Dov Zigler, economists at Scotia Capital Markets, our debt-to-income ratios are not calculated properly and therefore, do not actually reflect our real debt levels. The problem, say both Holt and Zigler, is that the ratio currently includes the mortgage debt taken on by Canadians, and that this huge amount of debt is spread out over the course of 20 or 30 years. The income that’s used for the ratio however, doesn’t take years’ worth of income into consideration, but that tax year’s alone.
“The ratio in our opinion is the single worst measure of household finances,” the two experts say. In order to fix the ratio, they also agree that mortgage debt needs to be taken out of the equation. That would give a better reflection of a person’s debt in one year, compared to their income in that same year. “Mortgages are currently 70 per cent of total household debt and they get financed over much of one’s lifetime,” they said. “That makes a comparison of mortgage debt to a single year’s worth of after-tax income a totally flawed measure.”
The two go on to say that our debt levels aren’t anywhere near what they were just four years agao, saying “At about three percentage points above inflation now compared to a peak of eleven percentage points above inflation back in 2008, it is hard to make a convincing argument that household debt growth is now excessive and needs policy attention.”
Holt and Zigler also believe that household debt isn’t the concern the government believes it to be because homeowners are now starting to give up credit cards and high-interest loans in exchange for low-interest 2nd mortgages and home equity lines of credit in Canada.
The two economists are especially worried that increasing the interest rate would cause a major slowdown in Canada’s housing market. And that this, combined with tighter mortgage and housing corporation rules, could bring the market to an almost complete halt.
That is something that Bank of Canada Governor, Mark Carney, is also worried about – and why he hasn’t raised rates yet. But even with these opinions, there’s little doubt on anyone’s part that the Governor will indeed raise rates, and that it’s going to be sooner rather than later.
