Despite the Bank of Canada's concerns about rising debt, Canadian households aren't headed for a U.S.-style sub-prime-induced real estate meltdown, according to a report by CIBC World Markets.
The report said that while Canadians need to be prudent about increasing their debt levels, several factors will buffer Canadian homeowners from being saddled with mortgages they can't afford.
These include the fact that some mortgage-holders have substantial home equity, even if home prices drop. Some also have high debt payments that could be reduced, because the high payments are meant to accelerate the paying down of the mortgage principal.
The report said that history suggests many Canadians will jump from variable to fixed mortgages in time to avoid the full brunt of a variable mortgage rate shock. Also, Canadian financial institutions generally issue variable rates only to customers who quality for a three-year fixed-term rate, which is well above current variable rates. So, while variable rates will likely rise, most will be able to absorb the rate increase and remain within a qualification threshold.
"The result is that [the] number of Canadians truly at risk could be substantially less than the Bank of Canada's estimate," said Avery Shenfield, CIBC World Markets chief economist.
The report said that even with the unprecedented level of volatility over the last two years in the real estate market, housing prices and resale activity are beginning to turn around with the real estate sector now outpacing the rest of Canada's economic recovery.
Benjamin Tal, a senior economist at CIBC World Markets, said interest rates have played a minor role in driving mortgage default rates.
"Mortgage arrears rates are highly correlated with the unemployment rate, with little or no correlation with changes in interest rates. The same goes for the economy in general. Over the past three decades, personal bankruptcies have risen twice as fast in an environment of falling interest rates than in an environment of rising rates."