Debt-to-income may be at 148%, but CIBC economist Benjamin Tal says the mortgage picture isn’t as bleak as some have portrayed it.
Here are snippets of his statements from a BNN interview Tuesday:
“We cannot talk about the quantity of debt without talking about the quality of debt.”
“The quality of debt in Canada is totally different (than in the US before the crisis).”
“Subprime in Canada was less than 5% (of overall mortgage volume). In the U.S. it was 33%.”
The number of Canadians vulnerable “in terms of very low equity on their house and very high debt service ratio” is 4%.
Canadian credit quality has been “improving” for the past few years.
Canadian credit growth is now at a “9-year low.”
The “Canadian real estate market is stagnating,” which will lead to slower credit growth (because people won’t borrow as much if their homes stop appreciating).
Canadians have become more sensitive to a rise in interest rates.
When rates rise, “of course you will see some increase in defaults.” However, rates rise for a reason, Tal says—because the “economy is doing better.” When the economy improves, unemployment falls.
“The unemployment rate, not interest rates, is the number one factor impacting defaults.”
Higher rates will reduce consumption because people are forced to service more expensive debt.
There’s a silver lining to that last point. Some economists believe that higher rates (and lower consumption) will exert a drag on the Canadian economy and self-regulate interest rates somewhat—i.e. keep rates lower than they otherwise would be if Canadians were not in so much debt.
Rob McLister, CMT
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