High household debt poses a major challenge to the recovery of the Canadian housing market post-2024. The Bank of Canada's recent cuts brought the mortgage interest rate down to 3.75% overnight following four successive rate reductions. However, the high debt burden continues to weigh on households across Canada.
This scenario complicates the possibility of a quick recovery in the property market. Many buyers are now cautious about mortgage commitments despite the Bank of Canada rolling out mortgage interest rates that are more favourable.
Household Debt in Canada
According to data issued by Canada's housing agency, Canadian households are highly indebted compared to other countries. The household debt-to-income ratio exceeded 180% in 2024, which means for each dollar of disposable income, a Canadian owes $1.80 in debt.
A larger percentage of this debt is linked to mortgages, and these figures have grown exponentially since the 2010 housing boom. During this 'real estate boom' period, ultra-low interest rates resulted in a borrowing frenzy.
In addition, a report by Statistics Canada shows that mortgage debt increased by 6.4 percent year-over-year in 2024, hitting close to $2.1 trillion. A large percentage of this mortgage-related debt is held by variable-rate borrowers. These individuals were affected by the sharp increases in monthly mortgage payments when interest rates peaked at 5 percent in 2023.
The recent interest rate cuts by the Bank of Canada may have provided some relief. However, the accumulated household debt is still a considerable challenge to the housing market's recovery post-2024.
How High Household Debt Affects Real Estate Demand
Limited Purchasing Power
Sure, the interest rates in the housing market have reduced considerably. However, potential property buyers face difficulty qualifying for new loans or mortgages due to their existing debt levels. Most households have stretched their borrowing capacity to the limit. This leaves little space for additional leveraging, even with the dropping rates.
According to Canada Mortgage & Housing Corporation, first-time house buyers are the most affected by the household debt burden. In Q3 2024, the CMHC reported that mortgage applications by first-time property buyers were reduced by 8.2 percent.
York Credit Services, a debt consolidation company in Ontario, warns that first-time property buyers are a critical housing market segment. The significant drop in mortgage applications recorded in Q3 2024 reflects the hesitancy in entering the real estate market despite the improving borrowing terms.
Minimal Real Estate Market Activity
A higher level of household debt has subdued the overall real estate market, even with the falling mortgage interest rates. A Monetary Policy Report issued by the Bank of Canada in October 2024 showed that home prices in major markets like Vancouver and Toronto have stabilized. However, high household debt levels continue to slow down real estate transaction volumes in these markets.
Nationwide, real estate transactions remain 13 percent below the recorded pre-pandemic levels. This underscores how high household debt is dampening market activity, particularly in the housing sector across Canada.
In Vancouver, the average house price exceeded $1.2 million in 2024. In such cities, many first-time or prospective buyers feel locked out of the property market owing to prohibitively high monthly payments and strict mortgage stress assessments.
The stress test was introduced in 2018 and it requires potential buyers to qualify at a considerably higher rate compared to their contract mortgage interest rate. This rate is a significant obstacle even with the recent policy amendments.
Missed Mortgage Payments
Defaults on mortgage payments have remained relatively low (0.19 percent) in Q3 2024. However, there are signs of heightened stress in the system. For instance, Equifax Canada reported a 12 percent increase in mortgage delinquencies among variable-rate mortgage borrowers over the past 12 months.
As the interest rates reduce, the effect will ease. However, the 'hangover' from the previous interest rate hikes means that most Canadian home buyers will struggle to keep up with mortgage payments and other debt obligations.
According a Financial Stability Report issued by the Bank of Canada in October 2024, households with high debt burdens are vulnerable to financial shocks. This situation is exacerbated by the slow wage growth and increasing inflation. This leaves less disposable income to meet monthly mortgage payments.
Tax Impact on House Market Speculation
In 2023, the federal government began taxing real estate flips as business income instead of capital gains. This tax aims to curb speculative activity in the housing market. However, it hasn't led to significant reduction in the demand for properties from investors.
For instance, in Q3 2024, about 2.4 percent of houses sold across the country were flipped within a year. This figure was just 0.2 points below the highest percentage recorded in history. Thus, investor interest in the housing market remains strong, especially in regions like Ottawa, where an increase in population and demand for rental units outpace the supply of real estate properties.
Implications of High Household Debt for the Housing Market
What does the high household demand mean for the housing market recovery?
Slow Recovery Instead of a Boom
Theoretically, the recent cuts in mortgage interest rates (to 3.75 percent) should increase demand in the housing market. However, the high household debt will likely cause a slow and limited recovery instead of a surge in house-buying activity. Many potential property buyers are still experiencing the financial strain of the past few years and are cautious of new debt commitments.
Limited Increase in Prices
Home prices across the country are expected to be relatively stable in 2025. Canada's Real Estate Association predicted a 1-2 percent increase in average home prices. In regions like Metro Vancouver and the Greater Toronto Area, home price growth will likely be lower despite an increasing population and growing demand for housing units.
Conclusion
The interplay between the increasing household debt and monetary policy will shape Canada's house market recovery post-2024. The falling mortgage interest rates may offer relief to many borrowers.
However, according to Certified Mortgage Brokers, the heavy household debt load limits the potential for a rapid resurgence in the housing market.
