We list some of the report’s more intriguing findings below…
The Debt Life Cycle
Indebtedness peaks in the 31–35 age range.
Mortgage credit is the #1 driver of total debt.
Households that have “higher expected future earnings” will often respond by “raising current spending” (e.g., It’s not uncommon for people to use future earnings to justify buying more expensive homes today.)
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In the past 30 years, the ratio of mortgage debt to disposable income has risen from ~50% to almost 100%.
“The large increase in total household debt since 1999 consisted primarily of home-equity extraction…which increased from around 2.2% of disposable income in 1999 to a peak of 9% in 2007.”
“The increase in home-equity extraction consisted mainly of net mortgage refinancing which could be partly explained by rising housing prices from 1999 to 2010.”
Draws on HELOCs have also risen significantly since 1999.
In 2009, net draws on HELOCs represented almost 1/4 of the total increase in household debt. (Households may have borrowed to compensate for the temporary decline in income during the recession.)
Despite rising home prices, income gains and low interest rates have supported affordability, which has led to “significant increases in home ownership and mortgage debt.”
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On the Financial Crisis
“A distinguishing feature of the recent financial crisis…is that countries with the largest increases in both their house prices and their ratios of household debt to income in the decade leading up to the crisis tended to experience the largest contractions in consumption during the subsequent recession.”
The U.S. subprime mortgage market grew to ~14% of outstanding mortgages before the financial crisis, versus only ~3% in Canada.
What Drives Home Prices
One model cited by the BoC attributes 2001 to 2010 home price gains to the following:
Increasing population 33%
Rising incomes: 24%
Declining mortgage rates: 13%
Other (including “a recovery from the sluggish price growth of the 1990s”): 29%
The Risk of Falling Home Prices
Simulations suggest that a 10% decline in house prices can generate a “peak drop in consumption of about 1%.”
“Given the increase in household indebtedness, the exposure of households and the financial system to fluctuations in house prices has increased markedly.”
The spread between the typical interest rates for unsecured consumer debt and a secured HELOC is approximately 250 basis points.
Rob McLister, CMT
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