Canada's Housing Bubble

Mar 31, 2010 The Canadian Press

New report says many Canadians struggling to pay for both shelter and necessities

Ottawa - A gap in the supply of affordable housing has left one-fifth of Canadians struggling to afford the homes they live in and there’s a risk that number could rise as mortgage rates increase from historic lows.

A Conference Board of Canada report released Tuesday, dubbed Building from the Ground Up, concludes 20 per cent of Canadians can only keep a roof over their heads by cutting costs in ways that could harm their health — such as buying less nutritious food.

The Conference Board defined housing costs as unaffordable if they exceeded 30 per cent of pre-tax income.

The report comes as CIBC and National Bank announced they were following the move of other major Canadian banks in raising mortgage rates by more than half a point ahead of an anticipated spike in the Bank of Canada’s lending rates this summer.

The biggest increase at five of Canada’s largest banks affects five-year mortgages. All are hiking their posted rate by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.

The rise in rates signals the end of an era of historically low borrowing costs that have contributed to an overheated rebound in the housing market, with some consumers taking on dangerously high debt loads.

The end to rock-bottom interest rates could pose a major housing affordability risk to those who have overextended themselves to get into the housing market, said Tom Carter, a University of Winnipeg professor and the Canada research chair in Urban Change and Adaptation.

Meanwhile, he added, income levels have remained relatively flat.

"There’s a lot of people who didn’t have to put very much down," Carter said. "Mortgage rate lending has been fairly flexible in recent years, but they still have very high mortgages and when the rates go up we are going to have more people with a serious affordability problem."

If the current bank prime rate of 2.25 per cent rises by 2.5 percentage points — an average increase during a rate-rising cycle — a homeowner with a variable rate could pay about 30 per cent more in mortgage costs per month, according to experts.

The Bank of Canada has kept its key overnight rate at a historic low of 0.25 per cent for more than a year to help stimulate the economy, but rates could rise by 75 basis points by September as the central bank moves to fight growing inflationary pressures in the economy.

Meanwhile, high construction costs have led developers to focus on building homes that are affordable to people in higher income brackets, leaving a large segment of the population underserved, the report found.

Carter said there is also a severe affordability problem for renters because the number of rental units in major cities is declining as developers build condominiums instead of apartment units.

Carter said there could be more defaults on loans and more home foreclosures in the coming year, but added most people will scrimp on other spending to pay off their mortgages or rents, posing a risk to Canada’s economic recovery.

"If people really have to cut back in other areas to make their housing payments, its going to affect consumer spending overall," he said.