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“A potential explanation for this phenomenon is that consumers with mortgages in areas with high house price growth have been shielded from insolvency over the past few years by the growing value of their home (e.g. the ability to extract home equity to consolidate their debts or sell their home to pay their debts),” it states. “Conversely, non-mortgage holders in hotter housing markets have missed out on the benefits of house price appreciation, while still bearing the costs associated with living in affordability-challenged areas (e.g. higher rents).”
In line with this possible explanation, the memo says, is that in British Columbia and Ontario, home to the pricey real estate markets of Vancouver and Toronto, the share of insolvencies filed by mortgage-bearing consumers had fallen sharply. Meanwhile, in the rest of Canada, those insolvencies had remained steady.
Recent public-opinion surveys have suggested that consumers have not forgotten about the risks posed by rising rates either.
A Royal Bank of Canada “Home Buying Sentiment Poll” found 45 per cent of those polled were concerned about interest rates in the coming year. And a recent poll conducted by the Credit Counselling Society, a non-profit that aims to help consumers manage their finances better, found that 31 per cent of Canadians it surveyed were having trouble paying down their debt, even with interest rates so low.
“If consumers don’t make a concerted effort to reduce their … non-mortgage debt over the next two to four years, and then rates start to go up — that could have a material impact on mortgage rates, which could have an impact on rental rates — then consumers will put themselves in difficulty,” said Scott Hannah, chief executive of the CCS, in an interview. “So that’s the challenge that we throw out there for consumers is, if you don’t get your financial house in order over the next three to five years, pay off your consumer debt, set aside three to six months’ worth of living expenses for emergencies, you’re going to be susceptible to the next thing, whatever that is.”