Hot Housing Market Changing Debt Dynamics for Some Canadians

If you’re between the ages of 35 and 44, chances are you’re in debt. With home prices reaching the stratosphere in red-hot housing markets like Toronto and Vancouver, we’re spending more than ever before just to put a roof over our heads.

A recent study from RBC echoes that sentiment – if and when interest rates rise or house prices fall, the most heavily in debt could face a real dilemma. If you’re up to your ears in debt, there are ways to protect yourself when interest rates eventually rise.

Real Estate Helps Grow Net Worth

Canadians aged 35 to 44 are heavily in debt, mainly because of the sky-high prices they’ve paid for housing, and are vulnerable to a rise in interest rates or a drop in house prices, says a study from RBC. The study highlights a sharp divide between Canadians 35 to 44, and those 45 and up.

While both saw their net worth increase from to 1999 to 2012, 60 per cent of the gain was from the appreciation of home prices. During this period, home prices were up a modest 4.6 per cent on average per year, compared to only 0.3 per cent per year in the last two decades.

“What we’re seeing is that net worth is improving, but it’s almost exclusively reliant on real estate for this one age category [35 to 44],” says Paul Ferley, RBC economist.

First-Time Homebuyers

Buying a home for the first time can be exciting – and costly. First-time homebuyers ages 35 to 44 are a lot more leveraged than older Canadians due to rising home prices. Although they benefit from record low mortgage rates, they aren’t in any hurry to pay down their mortgage, the study finds.

“There has been a shift in preference for current consumption at the expense of future consumption, resulting in less saving,” the report says.

Simply put, Canadians aren’t as disciplined when it comes to spending. While the older generation would save up for a new car, the younger generation is more likely to finance it through credit. The study highlights the fact that the 35 to 44 age group has higher levels of line-of-credit debt and vehicle loans. In fact, some are tapping into the equity in their homes with Home Equity Lines of Credits (HELOCs) for consumer spending.

With credit so easily available, it shouldn’t come as any surprise this generation’s reliance on credit, especially credit cards. However, living beyond your means is a dangerous trend. If you’re constantly carrying a balance on your credit card, it’s a clear sign you have a debt problem. While credit cards are a good way to manage your cash flow and earn reward points, you shouldn’t be using them to pay for a vacation you can’t afford.

The Threat of Rising Rates

As the saying goes, all good things must come to an end. A lot of homeowners have become accustomed to low interest rates. While low interest rates have been around since the financial crisis, we don’t know if and when they’ll rise, so it’s important to be prepared.

“Where we get a bit more concerned is in terms of more vulnerability to so called … economic shocks. An unforeseen sort of development like a marked falloff in housing prices or a sudden spike in interest rates or a big bump up in terms of the unemployment rate,” Ferley says.

“With this age category being more extended in terms of the debt they’ve taken on, relative to the other age categories, it makes them more vulnerable to that kind of shock.”

Protect Yourself from Rising Rates

The good news is there are steps you can take to protect yourself from rising interest rates or plummeting home values. A lot of homeowners aren’t in any hurry to pay down their mortgage. If you’re looking to get ahead financially, paying down your mortgage when interest rates are low makes a lot of sense. The same goes for high-interest debt like credit card and payday loans. By paying more than your minimum payment, not only will you save on interest, you’ll reach debt freedom a lot sooner.