As the spring market fast approaches, this past month has been a media frenzy. Maclean's first print issue in March featured a cover with a family walking up to a burning house, with the headline "You're About To Get Burned - Canada looks exactly like the US before its devastating housing crash - maybe even worse" splashed across the front. Days after this issue was released, The Star retorted with "Canada's Real Estate Market To Cool, Not Crash". The National Post published their two cents with "Ghost Of Fannie Mae Haunts Canada's Housing Agency" and "Why We're In Trouble If Housing Craters". The Globe contributed with "Home Sales Seen Rising, Prices Dipping In 2012 and "Carney Sees An End To Rock Bottom Rates".
I can only imagine what an average Canadian reader must think. The discrepancies and differences in opinion are from different ends of the earth. I can't say that I'm right, and anyone else is wrong, but what I can offer is my hands on opinion of what we see happening, and what I think will happen. So, I'm going to pick this apart for you - Realtor style. My three-part article will address the fears of the Canadian housing market following in the tragic steps of the American Housing Crisis. We're going to look at three of the main Canada versus the U.S. comparisons - household debt, interest rates, and housing prices.
Part I - Household Debt
The U.S. kicked off the housing crisis with a household debt average of $1.30. Today, the Canadian household debt is $1.51. So, with every $1 we make annually, we owe $1.51. These simple numbers are enough to scare the pants off of a lot of Canadians. But, let's take a true look at the nature of this debt. What is the average credit score across the U.S versus Canada? The average American credit score in 2005 was around the mid 600 mark, whereas the average Canadian credit score today is in the low to mid 700s. To state the obvious, Canadians can carry debt very responsibly, and our debt is manageable. Canada 1 - U.S. 0.
So how is it that Canadians owe so much more money than Americans? Maybe we don't. When publishing the average American household debt, there is a large factor that is not included in this calculation. In fact, this omittance is actually responsible for part of the decrease of the household debt that Americans have been bragging so much about as of late. Approximately $254 billion dollars of delinquent loans, charged off debt, and mortgage foreclosures were unaccounted for when calculating household debt in 2008. These unpaid debts are charged off when they reach serious delinquency, and are lost in an abyss. That is a staggering amount that would dramatically affect the household debt, especially when you think about this discrepancy having occurred for years.
Another thing to consider is assets and investing. This is definitely my hands on experience talking, but there is a vast amount of real estate investors in the downtown Toronto core alone. So, we have to ask ourselves, how much of that $1.51 of debt is servicing itself? The Toronto condo boom birthed so many investment savvy buyers that we now have anyone from 23 year olds to retirees purchasing investment properties. According to CRA, Canadian families with an after-tax income of $50,000 to $74,999 have a median net worth of $260,300, and families with an after-tax income of over $75,000 had a median net worth of $505,700. The average American household has a net worth $182,000 (median income is just under $50k). Let's factor this in for some rough calculations. Using $100,000 income, that would mean that Canadians owe $153,000 and Americans owed $130,000. If we add the net worth to that income, and then divide that by the debt, we are looking at a household debt of $0.42 for Canadians and $0.46 for Americans (I used the Canadian median of $260,300 to be nice).
All of my calculations are rough, but my purpose was to illustrate ambiguity, and to illustrate the nature of Canadian debt. I see buyers every day circulating their liquid money for investment purposes. An investment doesn't always pay off within the same year, so it won't reflect cap rates, projected income or returns on investments. I also see responsible buyers, who are not exceeding their means, and manage their debt comfortably.
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