Scotia Plaza by Wikimedia Commons

According to a recent report from Scotia Bank, the Canadian real estate market is cooling down. After stable growth since the market turmoil of 2008, the market is for the first time in red numbers. Compared to last year, it has declined 2 per cent. Despite the decline, our market still outperforms the vast majority of developed countries and cannot be compared to Ireland with its 19 per cent decline or Spain with its decline just under 10 per cent.

Factors of Decline

There are several factors that explain the current state. It has already been six months since IMF published its report that claims that the Canadian market is overvalued by 13 per cent with price-to-income and price-to-rent ratios well above historical levels. The other reason is the uncertainty caused by the current sovereign debt crisis in Europe.

Banks don’t want to suffer financial losses and therefore use stricter standards while evaluating potential borrowers. Moreover, the economy suffers from slower economic growth (well below 1 per cent this year) and disposable income is rising slowly as well. Last but not least, interest rates are almost two years on 1 oer cent and therefore any potential increase would curb demand even more.

Slower Rise of Debt

The slower rise of debt confirms all the above. A report by Statistics Canada shows the rise of debt-to-disposable-income ratio at a record 152 per cent compared to the 150.6 per cent in the last quarter of 2011. Although the slower rise is relatively good in its current state, it may cause trouble in the housing market. However; this is not probable. The number of sales compared to the number of listings is relatively favourable and other indicators suggest that a gradual cooling will prevent any sudden shock. Even if there were an economic downturn, the vast majority of Canadians wouldn’t be affected. Analysts of the central bank claim that only 6 per cent of households are vulnerable to changing financial conditions. However, this is still a higher number than the average of the past decade. These people could suffer from the correction of an overvalued market.

Indebtedness in Perspective

If we look at the indebtedness of Canadian households from a long-term point of view, we can see a substantial increase. Households owed $147 billion in 1982. By 2010, this number soared to $1,458 billion with a major increase during the last decade. Mortgages account for the majority of the debt (two thirds), while the rest goes to consumer debt. Even after considering inflation, the average debt is higher than before and debtors are younger than they were. The report from Statistics Canada also identifies groups that are the most vulnerable on loss of income. It shows that the group that pays more than 20 percent of its disposable income for repaying mortgages is the highest risk. Statistics show that if their income is lower than $59.2 thousand, they are not able to cover all their expenses and consume 111.1 per cent of their income.