percentage point a few years ago. “The increase mainly affected people with variable rate mortgages. Even though the increase was only a quarter of a percentage point, many people found it difficult to make ends meet, as monthly payments went up by more than $100 in some cases. They had to cut back on outings and groceries. A rate increase, however small, can have a huge effect on our economy.” Bruyère adds, “People now live on very tight budgets. An
increase of just 1% would be problematic. Many people would find it even more difficult to get by, especially with the forecast increase of service costs. A 2% or 3% rate hike would be disas- trous for them.”
Real estate’s domino effect Many Canadians are concerned about how rate increases impact the housing market and, in turn, the economy as a whole. A number of organizations and media — including the
OECD, the International Monetary Fund and The Economist — and many leading economists have predicted that the Canadian housing bubble will burst, especially since home prices have risen much faster than average salaries. The likelihood of the bubble bursting is debatable. However,
one fact remains: the economic repercussions of a housing catastrophe should not be taken lightly. According to data from Ben Rabidoux, president of North Cove Advisors Inc., a research firm that specializes in the Canadian economy and the real estate market, almost half (45%) of Canada’s GDP growth since 2000 is directly linked to construction, finance, insurance, real estate and similar sectors. “It’s substantial and very worrisome. Today, a huge portion of the economy is sensitive to interest rates,” says Rabidoux. In recent years, the real estate market — and its domino effect on numerous industries — has boosted the economy, but the opposite is also possible. According to Rabidoux, “Industries that depend on real estate currently gen- erate close to 27% of the annual GDP, compared with 23% in the early 2000s. These industries tend to expand when the housing market is doing well, but they also contract when it cools off.” Moreover, spending on renovations has doubled in real
terms (adjusted for inflation) in a decade. Most of this spend- ing is financed through home equity lines of credit, which are also very susceptible to interest rate fluctuations. “If interest rates were to rise, I don’t think we would be in for a soft landing,” says Rabidoux. “It would be rather brutal. A 1%
42 | CPA MAGAZINE | MARCH 2015
CANADIANS CONTINUE TO ACCUMULATE DEBT
Even though consumer debt is growing at a slower pace than income, Canadians are carrying more and more debt. According to a BMO report, the average Canadian household debt rose to $76,140 in 2014 from $72,045 in 2013. Alberta is the province with the highest level of indebtedness: for the same period, household debt increased 40% to $124,838 from $89,026. This situation is mostly attributable to rising house prices and the accompanying mortgages. According to StatsCan, Canadian household debt
hit a record high, hovering at 163% of our disposable income. So, the average Canadian owes $1.63 for each dollar earned in a given year. Credit reporting agency TransUnion estimated that during the five-year period following the financial crisis, inflation rose by 9%, but debt other than mortgages, such as credit card debt, car loans and lines of credit, rose by 37%. — DD
increase would result in a decrease in real estate sales of approximately 20% for a while.” Not all experts are as pessimistic. “Having debt is one thing,
but what matters is whether you’re able to pay it off,” says Stephen Gordon, economics professor at Laval University in Quebec City and a blogger for Canadian Worthwhile Initiative and
Macleans.ca. “The crisis in the US was triggered by, among other things, the sudden rise of the share of disposable income Americans needed to cover the increase in their mortgage pay- ments. However, the debt service ratio remains the lowest it’s been in more than 20 years in Canada. Even though the amount of debt has increased, Canadians still have the same wiggle room, more or less, to pay their mortgage.” Of course, no one wants higher interest rates, he says, but we
wouldn’t witness a financial crash like the one in the US. “That doesn’t mean there’s no cause for concern, but the soſt-landing scenario, especially for the housing market, remains more likely,” Gordon says.
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