By David Larock

Statistics Canada recently changed the way it calculates key economic data to bring its methods into line with agreed upon international accounting standards. As a result, the debt-to-income ratio for the average Canadian household shot up 11 per cent, literally overnight, to 163 per cent (a record high).

This has inspired lots of foreboding talk about how our “soaring” household debt-to-income levels are now higher than U.S. debt-to-income ratios were at the peak of their housing bubble. That may be technically true, but it is also totally misleading.

That’s because the standard method for calculating this ratio uses after-tax income, which isn’t a fair comparison because Canadian personal income taxes cover health care costs and American personal income taxes don’t. (To put this difference in perspective, according to my initial research the average American spends anywhere from 10 per cent to 20 per cent of their after-tax income on health-care related costs.)

While it has become fashionable to predict that Canada is headed for a U.S.-style housing crash, most economists still think that is unlikely and they use plenty of data to support their position.

To be clear, I readily agree that our household debt levels are too high and that’s why I have consistently supported the federal government’s attempts to reign in borrowing by changing the lending policies and regulations used by CMHC and OSFI. But that’s a far cry from believing that our debt levels are about to cause our houses to start spontaneously combusting. (Did I just give Maclean’s an idea for their next apocalyptic magazine cover … or have they used that one already?)

Before you start loading up on canned soup and fire extinguishers, consider this sampling of recent comments from the experts I read:

* A report by BMO economists in January 2012 first pointed out the flaw in using after-tax income to compare Canadian and U.S. debt-to-income ratio levels. Instead, they argued that using a debt-to-gross income ratio would provide a better apples-to-apples comparison. Using this revised methodology, BMO economist Sal Guatieri reported recently that Canada’s debt-to-gross income ratio (121 per cent) is still well below both the current (146 per cent) and peak (166 per cent) U.S. levels. That presents a very different comparison from the popular one being bandied about in much of the mainstream media.

* David Rosenberg, a well-known Canadian economist, wrote recently that our ratio of housing starts to the civilian population is “not far off the average of the last 10 years, whereas as in the U.S. back in the 2006-07 peak, that ratio was 25 per cent above the long-run norm.” In other words, Canada has not seen the kind of short-term spike in speculative real-estate investing/borrowing that we saw in the U.S. during the latter stages of their housing bubble.

* Mr. Rosenberg also notes that Canadian policy makers and regulators have been pro-active in responding to our rising household debt levels while their U.S counterparts were basically asleep at the switch until it was too late (hyperbole mine).

* Further to that last point, Benjamin Tal, an economist with CIBC, recently noted in an interview with Rob Carrick that overall Canadian household debt is now rising at its slowest pace in 10 years, while consumer debt levels are actually falling for the first time in 20 years. That kind of momentum makes for a trend in the right direction.

* In a separate report, Tal notes that the crash in U.S. house prices was far more extreme in cities with above-average levels of sub-prime lending, where prices corrected by an average of 40 per cent. This is more than double the average decline seen in U.S. cities with below-average levels of subprime loans.

“Eradicate subprime from the U.S. housing market and, instead of the most severe house price meltdown since the Great Depression, you get a soft landing.” By comparison, Canadian subprime loans account for about seven per cent of our total mortgage debt outstanding while U.S. subprime loans peaked at a little under 25 per cent of their total mortgage debt outstanding before their housing crash.

The bottom line: Like any informed observer who can see beyond his own short-term self interest to what is best for the whole economy over the long term; I am concerned about how ultra-low interest rates have pushed our household debt levels to record highs. But I reject the implication that we have driven over the debt cliff to financial ruin and are now in free fall just waiting to hit the ground.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. His posts appear weekly on his blog,


  1. I think this article misses a few key points I’ve outlined in a few of my blog posts.

    The fact is, Canadians have a TON of debt and many (until recently) have been using their rapidly appreciating properties as ATM’s – in many cases, taking out more equity than their home was originally worth in order to pay down other high interest debt.

    Not to mention, the market has been driven up by speculators and flippers. As the market slows and/or conditions change (interest rates, mortgage rules), we’re going to see a bunch of these people trying to cash out. That’s going to dramatically affect values.

    Add to that a condo market that’s turning to mush (and will only get worse as history repeats itself: ) – and things are far more grim than most people would have you believe.

    Every time I read one of these articles insisting things are going to be ok, I’m reminded of the parable of The Wealthy Man and the Monkeys – you can see how I relate it to the current Toronto Real Estate Market here:

    The fact is, debt and real estate are inextricably inked – the US market already show us this, and the house of cards is one small gust from collapse. We’re not that different from our american counterparts after all.

  2. Hi Just Chill:

    You say “Be educated.”

    Chew on this.

    Twenty-five percent of total U.S. debt is owned by China.

    China’s economy is slowing rapidly.

    China has spent trillions via state planning procedures building entire cities, yes, CITIES!…throughtout the outback areas in order to attract buyers to emigrate from the overcrowded cities. Guess what? No one is biting….the “cities” are empty with only about a 5% population factor therein. It’s a great big central planning bust which will cause the Chinese economy to have to absorb all of that misapropriation of otherwise should-be circulating, but now dead money. When China chills, and calls some of the U.S. debt (and China will do just that when it becomes politically expedient to do so…within eighteen months…or less), the U.S. will freeze up…again.

    Canada still exports upward of 75% to 80% of its manufactured/natural resources to the U.S. When the U.S. economy again spins into turmoil, as it surely must, we in Canada will be less than 18 months behind…to a lesser degree, but we will be driven into rescession neverthleless.

    We have to sink right to the bottom of the economic sink hole before we can start all over again.

  3. Interest rates are so low, there is no more wiggle room to decrease them to stimulate the economy.
    Interest rates will eventually go up and may possibly result in many homeowners mortgage payments doubling.

    The question is with prices coming down in some overpriced areas, and potential future interest rate increase, it becomes the perfect storm, are we ready?

    Values dropping resulting in lose of equity, interest rates increasing and possibly doubling payments, add to that economic global turmoil, job uncertainty.

    Get rid of your 3 cars, downsize to more moderate home, stop trying to impress the world with your material gains and learn to enjoy your world, because we are only here for a short while and we can’t take it with us.

    • I agree that it is in our collective best interest as a society to live within our means at the Federal, Provincial, Municipal and personal levels but I don’t think we are in an immediate doom and gloom scenario w.r.t. a real estate bubble in Canada. (Full disclosure – I am a Condo owner in Vancouver with a paid off mortgage, interested in buying additional rental properties in Lower Mainland so I would benefit from a real estate bubble bursting here)

      Rita Giglione wrote

      Let’s look at how interest rates have to increase to double a mortgage payment. Assume current rate is 3.5% (25 yr amortization, monthly payments, 5 yr fixed) – for each $100,000 of principal, your monthly payment is $500.62. In order for this payment to double, the annual interest rate would have to increase to just under 11.3%. (other examples: a) 3% now – for payment to double, rate = 10.55%; b) 1.5% now – for payments to double, rate = 8.4%)

      While I don’t disagree that interest rates will increase (hopefully sooner than later), I don’t expect rates to increase that quickly and I don’t expect prices to fall more than 10% to 15% in this area in the next 2 years.

      • Steve

        We should be living slightly below our means …..the Banks calculate GDSR and TDSR on the gross income not net.

  4. Excuse me Realtors, we have Crashed. My $280,000 purchase in 2007 now sells for $190,000 on the MLS (after your massive commissions I am left with under $180,000!) Foreclosures are up, Debt consolidation business is up 35% just from last year!

    Tell me how we escaped this crash? Thousands upon thousands of us did not!

    • Sharon

      I am sorry to hear about drop in your home value.
      Which community do you live in?

      Real Estate is a long term investment, and I always tell my clients that.
      The 80’s and 90’s type of gain are gone.
      Unfortunately 2008 crash wiped out a lot of wealth. 99% of the population did not see that coming.

      Consumers need to buy based on their NEEDS not GREED.

      • Rita, I bought based on NEED and the advice of my Realtor, 99% of whom didn’t see this coming. I can’t move even if I wanted to, these BANKS, who lent me the money, should have to give consumers a freaking break. Location : Alberta and second home, Kelowna BC.(foreclosure capital of Canada … yeahhh, great investment for sure just like the dude in the mall kiosk said..Jerk!)

      • 99% did not see the crash coming(including realtors). This is encouraging.

        They will not see the next either

  5. At one time mortgage interest rates at 12% P.A. were considerered nominal. It took $24,000 in interest to carry a $200,000 mortgage back then. Now a days (based on 3% P.A mortgage rates), it takes the same amount of interest to carry an $800.000 mortgage. Does one have to be a rocket scientist to figure out why people are so attracted to real estate these days?

    I do not see higher interest rates on the horizon anytime soon, but irrespective of low interest rates, only if the consumer debt load goes out of control will we see an economic disaster happen like we’ve never seen before..

  6. I personally hadn’t bought into the comparison with the US for too many reasons to list here. Let’s just say that after the Savings & Loan train wreck in the US in the 90’s I didn’t believe it was possible for them to come up with another way to financially self destruct but due to their insatiable greed not only did they ruin their economy, Europe and many of their other allies are still on the brink of financial ruin today.

    That being said, I don’t agree with our finance minister reducing the amortization from 30 years to 25 on CMHC Insured Mortgages. These loans represent assistance to first time or low income buyer’s and were intended to help not hinder our young people from purchasing their first home.

    There are and were plenty of safeguards in the approval process that protected CMHC from default on these loans and with a 5% equity there’s not a lot of room there for borrowers to get into trouble.

    Where they and we as Canadian consumers are getting into trouble is through credit card debt. The credit card companies must have thought they’d died and gone to heaven when the prime rate dropped below 5% over a decade ago and no one even blinked in their direction.

    Reduce debt yes and from your writing we seem to be on the right track but it has nothing to do with CMHC eliminating 30 year amortized mortgages and everything to do with consumer education.

    Now all we have to do is educate our Finance Minister about usury and how he can control it by putting a ceiling on credit card interest that floats at, say, even 12% over the Bank of Canada prime rate!

    Or would that be too hard a pill for his cronies to take?

    • totally agree about the credit card debt and the interest rates being charged. People can’t get out from that unless they can secure credit at a lower rate through a HELOC. The credit card companies need to be brought into check. Home ownership is good debt. Credit card debt is not.

  7. In Ontario, (don’t know about the other provinces) health care tax maxes out at $900 and at the most accounts for 1.35% of income.

    That cannot posibly be used as an excuse. A more appropriate adjustment would be to add back the mortgage interest deduction our friends south receive.

    When will this industry address the two real elephants in the room? The first being that with a 70% owner occupied rate, the only persons left to buy are entry level/marginal income earners; single/college crowd; under-aged; nursing home crowd and the delusional Turner followers who have been and will forever be praying for a 50-70% price drop.

    The second being the boomer retirement ramp up within 5 years. They who started out renting 1000sf apartments and then brought us the monster homes will refuse to go back to a unit no larger than their master suite.

    It won’t be a crash like in the U.S but it will be pretty a different market that’s for sure.

  8. If encouraging home ownership and the consequent possibility of Canadians living without a house payment were important, then the discussion would centre on reigning in credit card debt.
    Instead, the solution under discussion, being hailed, and in fact already implemented, clears up the problem of lower income people owning homes and small investments.

  9. I agree with Brian Martindales point of view…to add, my wife works in the financial industry & there is rarely a day that she isn’t consolidating debt by increasing a first mortgage or placing a second on the home. She makes comments that she feels a high percentage of these clients are already bankrupt & just don’t know it yet. When she points out that there won’t be room to do this anymore ( in some cases the second or third time ) as home prices are predicted to soften people don’t want to believe it. First many of them have never experienced a downside to real estate prices & don’t believe it will ever happen & second many still feel that there home is their retirement plan & they don’t want to hear that prices may fall. The days of using homes as an ATM machine are over & Canadians are in trouble. It amazes me how many people have very litlle savings for retirement. It isn’t just the young generation…many 45-60 year olds are in the same position. On top of the debt crisis ,we are entering a time when the baby boomers are starting to flood the market with their homes & in many cases moving out of the major cities & buying the condo lifestyle in smaller communities where it is much more affordable. This will cause an oner supply of re-sale homes. We may not Crash but I see an extended period ( 15-20 years, about the length of the baby boom ) where there will be downward pressure on home prices, probably to the tune of 3% per year .

  10. What most people have not figured out that with low interest rates you need to be paying off debt not accumulating. Shorten your amortization periods, bump up your payments and the percentage of your payments that go toward principle goes way up.

  11. Thank you for this very informative and supported by stats opinion. It is very helpful to hear the reality instead of just the stuff that sells papers. I appreciate this article that puts things easily into perspective as many do not think past a headline. It makes it easier to handle questions for my clients when you can simplify why the misinformation is out there.

  12. Let us not forget that David is a mortgage salesman, thus, he has an agenda/vested interest in keeping the public perception of a healthy real estate/mortgage lending market alive and well. Having said that, David makes a strong case for his viewpoint, from his perspective. I have a different perspective.

    Prior to Statistics Canada recently rejigging its calculation method resulting in the ‘on-paper’ increase of Canadians’ average debt-to-income ratio from about 149-150% to 163%, Canadians still owe 50% or more than they earn per year, no matter how one looks at the numbers.


    Why?…Cheap money!

    Why cheap money?

    To stimulate spending!

    Why the need to stimulate spending?

    To encourage folks to spend money buying things that they really don’t need?

    Why the need to encourage folks to spend money on things they really don’t need?

    Because we now live in a world (in western economies) economically driven/dominated by “artificially” driven economies, that is to say, economies of scale based upon “wants” vs the “needs” of developing economies. We now borrow cheap money to buy superfluous things, including: larger and larger houses, cars, TVs, trips, wardrobes, and other luxuries respectively, that we don’t really need, things that our post-WW II economy has continuously foisted upon us in order to keep the ever burgeoning economic GDP ball rolling.

    Imagine, we are a society that has been conditioned to spend money we don’t have, that we haven’t even earned yet, let alone saved for a rainy day, for things we don’t need, but want, because everybody else is getting in on, with ‘wishful-thinking’ blinders well positioned on each side of our/their heads, the cheap gravy train ride to ultimate economic hardship, comparatively speaking of course. Economic hardship for this generation will be nothing different than how our grandparents lived most of their lives, economically speaking.

    Data, data, data.

    Reality, reality, reality.

    By Canadians now apparently actively working to get out of their self-induced mega-debt, they must curtail spending, which in turn slows the economy, which in turn leads to recession, which in turn leads possibly to severe recession, which could inevitably lead to a mild depression…or worse. Most of the world’s population lives in what we would label as a depressionary state, but what they call normal life. It’s all that they know.

    What we know are artificially stimulated “good times”.

    At 65 years of age, I’m no economist by education, just a practicing one by dint of decades of observation, experience, personal financial experimentation, and, most importantly, via paying attention to economic history.

    I hope I’m wrong about the economic future I see on the horizon.

    I’ll be fine, because I have only needs to be met, and no unneeded wants.

    Everything old is new again.

    • Very well said. We all need to consider our spending habits. Our needs, our wants and the “do we really need” of our lives.

    • I’m glad to see and read that people may have the true story in front of them but remain in solution mindset , understanding the difference between needs and wants.
      Your comment is bang on! I’m not sure if you realize how accurate you are in your conclusion.
      Anyone reading these comments must have some curiosity as to why we let this happen? Or is it “how did we make this happen”
      Depending on how much you desire to understand will determine how much of this documentary you will complete
      For some it will blow your mind, and for some it will not compute
      Enjoy this BBC documentary called
      The century of the self

      • Hi Ed:

        Your remark “I’m not sure if you realize how accurate you are in your conclusion.” is an interesting one.

        I studied politics and psychology at Trent University with a twist; I initiated/completed my time/degree therein whilst in my mid to late thirties…well after having been working within the reality of the work force from my mid teens (when I quit school…I was a grade ten drop-out). I had quite an interesting/challenging time of it debating theory vs reality with some of my profs., many of whom were my age at the time. I emerged with my B.A. (Bugger All) in hand, but more importantly, I emerged from the process with a heightened understanding of human nature, both from a theroretical perspective as well as from an experiential perspective regarding the “indoctrination’, as I describe it, of students’ brains by some profs. who were hell-bent on creating new disciples of their own personal theoretically defined world views (sans any offsetting real life experience outside of the hallowed halls of academia). I had the most fun with these types when it got right down to talking turkey. Of course, I was just an uneducated worky from the lower class, both economically and intellectually, in their highly self-esteemed, intellectually arrogant opinions.

        We all looked down on one another’s short-comings, I must admit, on my part.

        Therein lies the rub; the more educated one becomes, institutionally only, thus, by others who have been educated institutionally only, by others created off of the same pattern, repeated over and over again by mere academics, most being bereft of real life forces acting regularly upon their perceptions beyond those gained from within the class room, the more slanted becomes the education system in favour of a one-way street view of the world as it ‘should’ be, according to an academic’s opinion based upon other academics’ opinions, ad infinitum, and the beat goes on.

        The truth is…the world is ‘already’ as it should be, always, at all times…always has been.

        The trick, for we humans, as individuals, is to effectively deal with what ‘is’, on a purely personal level, in the first place, upon which achieving said success, one can then go about helping others, if indeed help is requested, to achieve their individually defined ‘happiness’ goals. Only upon achieving said goal(s) can one determine whether or not said goals were worthy of the effort or not.

        That is when true education kicks in to one’s psyche.

        Been there; done that.

        The process is known within psychological circles as:

        “Maslow’s Hierarchy of Needs”

        The realization of true self-education is realized when one reaches the apex of the needs of Maslow’s triangle.

        One is then deemd to have achieved “Self Actualization”.

        The need for wants disappears, and the want for knowledge reappears.


  13. I think it should be stressed that the high levels of sub prime mortgages in the US (virtually many mortgages given w no credit check required and in some cases, no job required!) leading up to 2008 and our very low level of subprime mortgages in the same time period and now (all credit checked) is the main reason that we are not headed for the meltdown that the US experienced. The mortgage derivatives and unethical broker activity in the US aside.

    (I wrote a real estate blog for Huffington Post for 6 months but couldn’t comment on this stuff…holdback offers ok…the market, no…so this feels good!)

    • Susanne:

      I was a real estate appraiser, afiliated with the Appraisal Institute of Canada, during the period 2001 to 2008.

      Our office processed plenty of sub-prime mortgage/appraisal requests, some for the chartered banks, but many more for the likes of Wells Fargo, Monster mortgage etc., etc. They are still out there and are coming due. There are far more defaults occurring out there across Canada than you may be aware of, and the numbers are steadily increasing. Within a year-and-a-half interest rates will rise, mortgage payments will increase whilst real estate “prices” will inversely fall back into line with their actual local “values”. All real estate is over-priced across Canada at present, based solely on the consumers’ artificially propped-up ability to pay over-priced “prices” for emotionally over-“valued” properties.

      “Price” does not equal “value” unless the cost of borrowing to purchase said real estate mirrors a realistic demand for “needs’ vs “wants”; Economics 101 in real life.

      By the way, I am not aware that ‘any’ sub prime appraisal requests were delivered other than as “approved” for the amiount required/requested (within our office). It’s simply the good/accepted politics of the appraisal profession; if you want to maintain your business position with the lenders, don’t kill deals.

      That’s why I refer to the appraisal profession as a BULL SHIT profession…

      …and that is where the buck started and stopped in the U.S., and where it continues to start and stop herein the Canadian real estate economy.

      I speak from experience, and not from theory.


      • A seller wants to sell and a buyer wants to purchase, they’ve agreed to a purchase price with the consultation of their Realtors® – the property must be worth the agreed purchase price?

        In our area since August 08 – It’s my opinion that two foreclosures, court ordered sales have come on the market per day.

    • I’m not sure why people keep comparing Canada vs the US? Though we are tied together in some respects we are different.

      So, let’s do some comparisons:

      In the US a person can get a home with $0 down
      In the US a person can cash back with $0 down
      In the US, if the MTG becomes unmanagable a person can give the keys back to the bank, go across the street and buy a new home
      In the US, their debt load does not include healthcare

      Canada has, probably between 10-15% of sub prime mtg business
      The banks/lenders want you to have equity when buying
      You cannot just get out of a mtg if you do not want to pay
      Our economy, even though tied to the US, is much stronger

      Why is it that there is foreign money that keeps coming to Canada? Because they recognize the value of real estate here in Canada.

      Is Real Estate overpriced in Canada. Yes, in some parts more that others.
      You still have to look at supply vs demand.
      Yes the market is cooling but not crashing.
      Yes people have to curb their spending and pay down their high debt levels.

      Why is everyone so worried about the real estate market? If you want to buy a home buy a home. Whether to live in it or to rent out. You have to live somewhere.
      There is still a good demand for rentals in the GTA.

      Be educated.
      If you are going to buy, only because you want to flip and make $$, then you definitely have to do a lot of research.
      However, if you are going to buy and live in the property or rent it out (location location location) then I think that you’ll be alright and you shouldn’t be too concerned about all the negativity people seem to keep bringing up. Remember, bad news is what people debate about. Bad news sells

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