Debt making home ownership difficult: study

By Al Beeber - Lethbridge Herald on February 2, 2024.

LETHBRIDGE HERALDabeeber@lethbridgeherald.com

A Canadian financial website suggests that home ownership is becoming less like a dream for many.

A study by savvynewcanadians.com says 74.3 per cent of Canadian household debt is in mortgages, that debt which has increased by 17.7 per cent since 2019. And the biggest driver is mortgage debt which comprises 74.3 per cent of total consumer debt.

The website was created in 2016 by Enoch Omolulu, who immigrated to Canada in 2011 where he obtained a master’s degree in Agri-business and Agricultural Economic from the University of Manitoba. He also has a Master’s degree in Finance and Investment Management from the University of Aberdeen Business School and a Doctor of Veterinary Medicine from the University of Ibadan in his home country of Nigeria.

Omolulu, before starting his website, managed the province of Manitoba’s animal welfare program.

He created his website as an educational resource to help newcomers to the country adapt to a different financial system than in their home countries.

The study shows that Canadians now carry an average of $65,000 in consumer debt and that Canadian household debt levels are the highest among its peers in the G7. It says that mortgage debt contributed to overall consumer debt by 22.88 per cent because of a limited housing supply and increased borrowing capacity.

Home equity line of credit (HELOC) debt, which is a secured form of credit in which a lender uses a person’s home as a guarantee that borrowed money will be paid back, comprises 8.9 per cent of debt. Credit card debt amounts to 4.5 per cent of all debt while auto loans comprise 3.2 per cent.

“Canada’s consumer debt landscape is shaped predominantly by mortgages and Home Equity Lines of Credit (HELOCs), which account for a substantial portion of the borrowing habits, totalling 83.2 per cent of the debt composition,” says Omolulu in the study.

“The surge in mortgage debt, constituting 74.3 per cent of Canadian household debt, was propelled by soaring housing prices during the pandemic, prompting individuals to take on higher mortgage obligations to secure homes.

“Population growth and immigration have further intensified housing demand, exacerbating the housing market’s competitiveness. Notably, Canada faces challenges in housing affordability compared to its G7 counterparts, as indicated by the unfavourable price-to-income ratio,” he adds.

“HELOCs, contributing 8.9 per cent to the debt landscape, highlight Canadians’ flexibility in leveraging home equity for additional financial needs, demonstrating homeowners’ adaptability in managing their finances.”

Omolulu notes that “diverse borrowing practices are evident in credit card usage (4.5 per cent), underscoring the significance of short-term credit, and in auto loans (3.2 per cent) and lines of credit (2.3 per cent), emphasizing transportation and general borrowing priorities.”

These categories, he says,reflect the multifaceted nature of consumer borrowing habits in this country and showcase the adaptability and resilience of Canadians amid an evolving economic landscape.

Some of the insights of the study include:

• Canadians are taking more loans to buy houses.

• Limited supply of housing in some areas of Canada has led to increased competition among buyers, driving up prices and leading to more borrowing.

• Increasing discounts offered by financial institutions continue to boost borrowers’ interest in variable-rate mortgages.

Canadians in the last five years, however, have taken out fewer vehicle loans and other lines of credit due to various factors. One is that Canadians with bad credit or a limited credit history need help getting financing approved.

Another is that long-term financing “has exploded” with 55 per cent of all car loans at one point in 2023 being for a minimum of 84 means. Longer loans mean people are buying vehicles less frequently, says Omolulu.

Stress tests for mortgages may also be contributing to some Canadians “rationalizing their lines of credit by not applying for new lines,” he notes.

The city with the highest consumer debt per capita in 2023 was Vancouver at $360,683 followed by another B.C. city Victoria with $305,365. Edmonton (16th) and Calgary (18th) were near the bottom of the top 20 at $76,689 and $73,568 respectively.

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