There’s been a lot of talk in the country surrounding debt lately. And even with our household debt to household income ratio is currently sitting at 163%, Canadians don’t seem to be too worried. The amount of surveys and studies constantly being released show this. So why aren’t we worried? Mostly it’s because for the majority, our assets still outweigh our debts. And isn’t that the ultimate measure of wealth and stability after all? Well, it makes sense when you look at it on paper. But Bank of Canada Mark Carney says that if you’re doing this and sleeping well at night because of it, you could find yourself in a dire situation.
It was on Wednesday this week that Mark Carney met with the Senate banking committee, and he spoke about this very thing. Mr. Carney thinks that the actual term “equity” may be misleading to some homeowners, and leave them thinking that they’re safer than they actually are. Because while it may be true that you have all that equity piled up, you also may not be able to use it when you want, or at all. And in that case, if your debt is too high, your assets will then be rendered basically meaningless.
“We’ve seen it over and over again, most recently in the United States, where people get sucked into a balance sheet analysis that says, ‘I’m very wealthy because my assets are worth more than my debts,” Mr. Carney said. “But they are illiquid, and they can’t service debts because they lose their jobs or interest rates go up or both. And that causes the default.”
He says that the problem is that real estate assets can go up and down. So if you’re working in that “balance sheet” mentality, your assets may not be worth as much as you think. And even worse, if you lose your job or have an unexpected event such as an illness or other event that saps your income, you may not be able to make mortgage payments. Of course, then you’ll default and go into foreclosure. And that asset that you’ve been relying on may not be there at all.
Of course, there’s also a huge difference between owning a home (even if it’s entirely paid off,) and having a stack of hundred bills beside you. That difference is that you can easily pick up and spend that cash of bills, whereas you can’t with a home. So what if you can’t sell when you want to? Again, your home as an asset is basically useless.
The point Mr. Carney is a good one, and perhaps not one that many Canadians have thought about. Yes, your home is an asset. But when it comes to talking about debt, it’s something that should never be fallen back on in the chance of “just in case.” Because when that happens, you may also be facing the “just in case” you lose, or can’t sell, your home.