Wealth and homes on the Sunshine Coast
Are we rich or are we poor? It’s a relative question, isn’t it? People spend considerable time and effort to figure out wealth growth and decline. Here is how that relates to your home and family.
If you purchase a $200,000 home and you have a $100,000 mortgage loan against it, your net worth in that home is $100,000. Easy enough, right? A few years later, your home might be worth $250,000 and your mortgage will be paid down to $90,000. Now your net worth is $160,000 – not bad for living where you want to live and doing what you want to do.
Of course, it could go the other way too. The house could lose some of its value, say $20,000. At the same time, your mortgage would still have been paid down to $90,000 so your net worth is $90,000 – a slight decrease from your original position. It could be worse: If you’ve also taken out consumer loans in that period and blown the money, that would need to be deducted from that figure as well. Ouch!
At last count, the average consumer had about $25,000 of non-mortgage household debt. The average household carried an additional $75,000 (give or take) in mortgage debt. Those amounts vary greatly and do not take into consideration the entire picture of one’s balance sheet. Essentially, they mean very little, when pronounced just like that.
Recent figures are giving a bit of insight into the sources of indebtedness. Where 20 years ago, one would have a mortgage loan and perhaps a car loan, outstanding credit card balances and perhaps also a personal loan, we now see a trend towards the revolving credit. These are lines of credit that are either secured or not. When they are secured, they are called HELOCs (Home Equity Line of Credit). When they’re not secured, they come by many names. The latest figures from TransUnion suggest that the year-over-year growth of this product is 17.5%.
Mortgage credit rose 7.6% annually over a similar timeframe. CIBC says that this figure is coming down, standing at 7% right now and expected to drop to 5% by year-end. The growth rate for mortgage debt will slow as home prices moderate and interest rates climb. The government’s newest mortgage restrictions will curb volume as well.
CIBC says, “We expect that the move to shorten maximum amortizations from 35 years to 30 years will cut the growth in mortgage originations by 2-3 percentage points in the coming 12 months.”
TOO MUCH DEBT?
Although we’re still being barraged with ominous warnings about the dangers of too much debt, it appears that most people have figured this out long ago. We were already cutting the growth of borrowing by the middle of last year.
One thing this shows is that your interpretation of the facts depends a lot on which facts you look at. Is there a lot of debt? Yes, of course. But the trend has clearly been improving.
Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty, have been cautious, focusing on the danger that when people carry a lot of debt in relation to their incomes, the carrying costs can jump to a painful level when interest rates eventually rise.
High debt levels put a stress on consumers. It’s definitely a risk for the economy. But in the context of Canadians’ relatively good financial health, the risk is not that the economy will collapse, merely that it could be slowed. Gradually rising interest rates will squeeze consumer spending more than they normally would unless the debt load shrinks.
A top economist at BMO says that high debt levels are not a plus for the economy, but they aren’t likely to tip the economy into crisis, either. He points out that, even as Canadians’ debt has risen, so has the value of their assets, whose value “more than swamps the size of their debts.”
These include not only home and property values but also holdings of stocks, bonds and other financial assets. With the recovery of stock markets over the past year, average household net worth has risen to an impressive six times the size of disposable income. This is up from an average of five times in the 1990s.
BMO also says that “debt growth is poised to slow amid the cooling in the housing market”. While debt remains a real issue and probably needs to be whittled down, this report’s conclusion remains useful to keep in mind: “A singular focus on debt shows an overly negative picture of Canadian household finances.”
The long and short of it is that the “debt problem” appears to be fixing itself. Let’s not forget that extra borrowing has been encouraged over the past few years. It was “official policy” to lower interest rates so people and business would spend more AND borrow more. The purpose of the exercise was to get the economy going at all costs. Obviously, if you spend now to pay for it later, then that’s exactly what’s going to be happening. For as long as we own way more than we owe, the system should keep on working.
Many people find “money” an interesting topic. Here are some related blog articles that’ll keep you reading for quite some time:
Financial security through home ownership: http://www.menno.ca/?p=4950
Mortgage fraud in some detail: http://www.mennorealty.ca/Blog.php/fraud
Mortgage specialist or mortgage broker? http://www.menno.ca/?p=4253
Here are the new mortgage rules (again): http://www.mennorealty.ca/Blog.php/rules