Fitch, OECD Warn Canada Regarding Housing Market Debt – “People should think twice about continuing to leverage up in order to buy more house than maybe they really need”

“U.S. ratings agency Fitch examined the exposure of Canada’s six largest banks to mortgage risk and found that household debt fuelled by mortgage credit expansion in Canada is the largest threat to credit profiles.
‘We’re not talking about a U.S.-style situation at this juncture’
“These are quite high levels of debt for households and the movement in house prices, we don’t think this is sustainable in the long term,” said report author Fabrice Toka, senior director at Fitch.
The six banks have a combined $730-billion in mortgage exposure and an additional $182-billion in home equity loan exposure, the report noted.
High unemployment or interest rate shock “could aversely affect the ability of leveraged homeowners to meet their mortgage obligations,” the report said.”

National Post, 21 May 2012

“Canada’s central bank should move its benchmark target for the overnight rate above its current one per cent level or risk unsustainable increases in the country’s inflation rate and real estate market, the Organization for Economic Co-operation and Development said today.
The bank has held the rate steady at one per cent for the last 13 consecutive policy meetings, dating back to September 2010, the longest the bank has held steady since the 1950s.
“If rates go up something like we are suggesting then mortgage rates will be in more like the five per cent range. People should think twice about continuing to leverage up in order to buy more house than maybe they really need” said OECD economist Peter Jarrett
The OECD made a similar suggestion to Canada’s central bank a year ago, and was ignored.”

CBC, 22 May 2012

22 responses to “Fitch, OECD Warn Canada Regarding Housing Market Debt – “People should think twice about continuing to leverage up in order to buy more house than maybe they really need”

  1. application of the word “leverage” implies financial investment. Many folks are buying a home to raise a family, not for the purchase of turning a profit.

    • The financial effect is the same.

    • It is a leveraged purchase. The reason for buying is immaterial. Some buy from fear others from speculation, some becuase they can afford to and others despite the fact they cannot.
      leveraged purchases, when rates are at all time lows and wage growth unlikely requires caution to put it mildly.

    • Oh-ho! And once again we present the home-investment state duality for real estate. It’s a wonderfully fascinating effect: one will find a property is both a home and an investment, depending on which state is needed to elicit the desired emotional defence mechanism.

      • Precisely. Other than that… A Trillion or so in exposure (leaving aside CMHC, for the moment)… What could possibly go wrong? I sense an imminent NonLinear Disturbance in TheForce….

    • Renters Revenge

      Good one F1!

      • “Except she was always using the word ‘infer’
        When she obviously meant “imply”
        And I know some guys would put up with that kind of thing
        But frankly, I can’t imagine why”
        – Weird Al Yankovic

  2. Told-you-so-in-2007

    Ahhh, you are so right, fishy. If you are borrowing money to buy that house, whether an “investment” in the official sense or not, it is a leveraged purchase. Leverage is wild fun on the way up, but is also punishingly vengeful on the way down. Once you assume debt you are committed to making the payments on it, no matter what the markets do- that fact is all that matters n a down market.

  3. All those looking at us from the out-side-in see what’s going on; why do so few in here get it?
    (rhetorical question; we know why; greed.)

  4. Michael Shih

    why so few get it? because all the politicians, investors, agents and bankers have vested interests in the market keeping going up. they got it but pretend not to get it.

  5. borrowing money for consumption is not leveraging

  6. Politicians, including our prime ministers, have limited political lives. They have incentives to make decisions to boost short term economic growth at the expense of long term prosperity of the country. While raising interest rates at this junction is good for the country in the long run, it is bad for the careers of the politicians. So why should they do it unless they have a heart of good. Neil Young is still looking for it while he is getting old.

  7. Searching for a heart of gold, and I am getting old. how true!!! politicians (central bankers like Greenspan included) are like prostitutes, only worse. Prostitutes at least make a honest living.

    • Spot on; regarding this major flaw in the system.
      Term limits may help.
      Or special prizes for politicians that come up with plans that payoff in the long-run, rather than the short.

  8. Bubble trouble?
    Watch the man in the plastic bubble
    Bernanke pops you out of rubble.
    Here comes easing, look out Jack!
    If you’ve got a sag, he’ll cut you slack.
    Six bedrooms for Dad and Mother
    So sis can’t trouble her mean old brother.
    Bubble Trouble? That’s Cash-0-matic Trouble!

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