Room 32 of the B.C. Supreme Court in Vancouver is where dreams of owning a home go to die. It’s the main foreclosure court in the Lower Mainland, where banks and other lenders ultimately turn when homeowners can’t keep up with their mortgage payments. The homes get seized, then sold off. “There are many tears on that carpet,” says Andrew Bury, a partner at Gowlings and the top foreclosure lawyer in the city. But lately the cramped courtroom has come to represent something else entirely—the utter insanity of Canada’s red hot housing market.
Last week Bury was in court to seek approval for the sale of a one-storey foreclosed home in central Richmond for $670,000. That was already $40,000 more than the house had been valued at two months earlier. Then, as he always does, Bury asked whether any other bidders were interested in the 2,000-sq.-foot home. Ten hands shot up. What happened next left him stunned. After a secret auction, the winning couple offered a whopping $852,500. “That’s an extreme case, but it’s the kind of thing we’re seeing all the time now,” says Bury. “It’s a feeding frenzy out there.”
Forget all the talk about a double-dip recession. In Canada, most signs point to a double-peak housing bubble. After barely pausing to acknowledge the financial crisis, Canada’s residential real estate market has roared back to life, reaching record highs in recent months. The rebound has once again touched off a furious debate about whether we’re now in a housing bubble. But it’s quickly becoming clear this is about a lot more than just people paying too much for homes. In the same way house prices have defied the moribund economy, Canadian families, already saddled with record levels of debt, have continued to pile on mortgage and consumer loans at a blistering pace. In the last 10 years the amount of consumer and mortgage debt hanging over our heads more than doubled to $1.4 trillion, with $100 billion of that taken on in the last year alone.
When it comes to housing bubbles, the people who usually worry the most are those in the market for a home, or those who have recently bought one. Yet there’s mounting evidence that we should all be concerned about the serious problems brewing inside household finances. Not only are there scary similarities to America’s doomed housing bubble of a few years ago. We’re also starting to look like Americans in the way we’re wilfully ignoring the dangers of carrying too much debt. And that could pose a serious threat to any middle class recovery, and to the entire economy, as we try to crawl out of this recession. “If interest rates go up just two or four per cent we could see a crisis,” says Ian Lee, director of the MBA program at Carleton University’s Sprott School of Business, and a former mortgage banker. “This thing could blow up and drive us back into a recession.”
Yet for all the stern warnings about our personal debt levels, Canadians remain remarkably unmoved. The purported reasons for our sense of immunity are many—that our banks are healthier, our mortgage rules tighter and our regulators more adept. But most of all we’ve convinced ourselves we’re a nation of prudent savers and responsible borrowers. Our political leaders tell us this, as do the banks, business leaders and anyone else who benefits when consumers spend money they don’t have. But our days of parsimony have long since passed. Where we used to save 20 per cent of each paycheque a couple of decades ago, in recent years the average middle class family has put away barely two per cent. We’ve taken our responsibilities as borrowers and put them on a 40-year layaway plan.We’ve rushed headlong toward a buy-now-pay-later economy. Now it’s nearly time to pay up. And many just don’t have the cash.
Even before the recession began, Canadians were up to our eyeballs in debt. Since then, we’ve slipped below the surface. Over the last two decades, mortgage debt in Canada has nearly quadrupled to almost $1 trillion. At the same time Canadians have fallen in love with plastic. Credit card balances are up fourfold in just 10 years to $54 billion. Credit card companies repeatedly point out 70 per cent of card users pay off their balance each month. But many borrowers simply shift money from one form of debt, like their Visas and Mastercards, to another, like personal lines of credit. In the early 1990s, lines of credit were rare. Only about $4 billion had been drawn down. Today that figure stands at $200 billion, a staggering 4,800 per cent increase.
Absolute numbers tell only part of the story. To understand just how deep in hoc we are, you have to put that debt in perspective. One approach is to look at how much debt households are carrying relative to their personal disposable income. The results are shockingly American in scale. According to the Bank of Canada, the debt-to-income ratio of households in this country stood at 142 per cent in the second quarter of 2009. What that means is that for every dollar Canadians earned, they owed $1.42 in debt. That’s up considerably from 116 per cent in 2005. And by some estimates, it’s since blown past 145 per cent. By the bank’s own estimate, that ratio will rise to 160 per cent in two years, roughly where it is for American households. Except Americans are paying down their debts. So sometime in the next year or two we will leapfrog past America’s debt-laden households. What’s more, in terms of household debt relative to GDP, Canadians and Americans are already nearly neck and neck. “No one knows what the magic number is before we start to feel serious repercussions,” says Rock Lefebvre, a researcher with the Certified General Accountants Association of Canada. “But the numbers are getting dangerous.”
Perhaps the most startling aspect of Canada’s looming debt problem is how fast we’re making it worse. Canada is virtually the only country where households have taken on more debt during this recession. While total household debt in foreclosure-ravaged America shrank 1.7 per cent over the last year, debt levels here jumped seven per cent. In particular, according to Statistics Canada, in November personal lines of credit surged 20 per cent from the year before, loans for home renovations were up 31 per cent, and balances of credit cards jumped another 6.9 per cent. But in dollar terms, most of the increase in household debt has come as the result of the huge mortgages people are taking out to buy homes at today’s soaring prices. Over the past two difficult years of the economy, the total residential mortgage debt load in Canada ballooned 18 per cent. “We’re the anomaly in global markets,” says Derek Holt, an economist at Scotia Capital. “We continue to climb to new highs with house prices and we haven’t seen any deleveraging among households. What’s so special about Canada that we should be experiencing this while every other industrialized economy went down and stayed down?”
