Continuing our consumer debt series, and today we’ll take a look at how interest rates play into things. So lets jump right in and start with interest rates and bankruptcies.
Here I’ve overlayed interest rate and the national and provincial bankruptcy rates. What we can take from this graph is that the gradually decreasing interest rates haven’t had any noticeable impact on bankruptcy rates. The one thing that does stand out is the dramatic spike in interest rates in 1994/1995, which coincided with the start of a more gradual spike in bankruptcy rates which eventually topped out in 1997.
It’s hard to say if, or how much, of a causal relationship may exist between these happenings, but as we discussed in my last post, people are increasingly likely to default on loans early in their terms, particularly when the rates charged are high. So the rise in bankruptcy rate could be a remnant of people taking on debt during the interest rate spike… or it could be nothing. Worth noting anyway.
Moving on, now we’ll hit on interest rates and mortgage arrears. This data goes back one more year, and here we can see there was an additional spike in interest rates in 1991… and like the bankruptcy rate, we can again see an arrears spike lagging, and topping out about two years after the interest rates did.
Again this could be a coincidence, but such a relationship would seem rather intuitive and seems to show abrupt interest rate spikes may contribute to later spikes in loan defaults. The slow decline of interest rates don’t appear to have a major effect, but rapid increases do seem to be a noticeable driver.
So, obviously in our current low rate environment this could spell trouble ahead as rates are almost assuredly to rise at least back to more historical norms. That graph is also another reminder of just how historical norms have been and how fortunate borrowers have had it for the last decade. 7.5% appears quite moderate over the last 20 years (and if we went back 30 it would look even better), but if we suddenly found ourselves in that situation tomorrow, havoc would be wreaked, and not just on the real estate market.
Finally, cause I have the data and went to the trouble of making the graph, we’ll take a look at interest rates and average bankruptcy deficiency We hit on this last week, but for a quick and dirty explanation, deficiency is the surplus of liabilities over assets upon filing for bankruptcy.
This data goes back much further, all the way to 1976 and the series was annual. Obviously what catches everyone’s eye is the big spike there in the early 80′s. Seems there were a whole lot of bankruptcies that included foreclosures during that spike, especially in Alberta.
Beyond that period there doesn’t appear to be as much a relationship between the measures as the ones we’ve discussed earlier. But as I discussed last week, most of the time the majority of bankruptcies do not include foreclosures, so that isn’t surprising. While we don’t have foreclosure numbers going back to the early 80′s, the deficiency measure would seem to indicate there were a whole lot of them.
Anyway, hope you guys found this interesting, a little macroeconomic food-for-though to chew on this weekend. Take it for what it’s worth.
Also prepared a graph comparing arrears and bankruptcy rates, but figured the post was long enough and it didn't add much.
Thanks so much for writing this blog.
I'm a recent transplant from the States to Edmonton, and I've been a bit baffled by the housing market in town. Colleagues are encouraging me to purchase a house. Quite frankly, I'm pretty wary of this housing market.
I've got relatives in San Francisco and Seattle, and have watched those housing bubbles grow and pop. I think Edmonton might be on top of a big bubble, but I'm not quite sure I understand Canadian housing lending practices.
For example, why do so many people have these 1-5 year mortgages? Is it possible for people to get a fixed interest rate for longer then five years? Why aren't my colleagues worried about future fluctuating monthly payments when interest rates go up?
In the States, it was the ARM resets that caused many people to loose their houses. But in the States, we cannot use the bankruptcy courts to renegotiate housing payments on our primary residences. (The laws allow people to renegotiate mortgages on second residences.) It was this problem that caused so many foreclosures. Can Canadians renegotiate their mortgages in bankruptcy court?
Thanks again for writing this blog. It's been comforting to find sane people who know that housing prices don't always go up.
Yeah, unfortunately we Albertans (and Canadians in general) really like the "it's different here" narrative… even watching the destruction in the US from next door we're still largely blissfully ignorant of the phenomena.
Seems true for all bubbles, it was same during the dot-com boom, one day people were clamouring to buy up Nortel shares at $124 a pop… not to long later you couldn't get $0.50 for them. The underlying fundamentals are rotten, but no one seems to care as long as things keep going up.
Re: Mortgages: Yeah, they're a lot different up here. Most people go with the 5 year fixed rates here, which are like certain ARM-Hybrids in the States. Generally they have actually been very beneficial for Canadian borrowers because rates have been for the most part going down for the last 25 years, so every time they renew you end up paying about the same or less.
Unfortunately I think this has instilled a false sense of security in Canadians as all too often they do not consider the possibility of rates going up when they buy. And because of the CMHC, the banks have no risk in lending, so they make no qualms about letting people leverage themselves to the max on cheap credit.
Trouble is now we're on the cusp of a new paradigm, interest rates have bottomed out, they can no longer go any lower, and with governments world wide suddenly running large deficits it's bound to force interest rates well up as the bond market floods, likely beyond the typical 6% people have become accustom to.
Unfortunately most people put any more thought into their purchases then what their monthly payments will be.
Not sure why our mortgage system evolved differently then the one in the US. You can get loans longer then 5-yr in Canada, most outlets at least offer 10-yr, and some 15-18yr (haven't seen any longer, but they may be out there)… trouble is that the rates go up significantly the longer the term. Just looking at BMO's current posted rates 5yr-5.84%, 10yr-6.95%, 18yr-8.95%… and that curve is usually even steeper.
Where as in the US their 30yr mortgage rates are usually very competitive, if not lower then our 5yr, obviously lending is much more competitive down south.
Like I mentioned earlier, the 5yr terms have worked out well for Canadian borrowers the last 25 years as rates have generally been going down (I did a post on this subject awhile back http://edmontonhousingbust.blogspot.com/2009/04/mortgages-fixed-rate-mechanics.html)... but now that rates have bottomed out, we're now going to find ourselves running into the same problems the US had with ARM's resetting at higher rates, especially in 5 years when those that bought the last few months at all-time low rates get hit with whatever the rates of the day are in 2014.
Yeah, unfortunately we Albertans (and Canadians in general) really like the "it's different here" narrative… even watching the destruction in the US from next door we're still largely blissfully ignorant of the phenomena.
Seems true for all bubbles, it was same during the dot-com boom, one day people were clamouring to buy up Nortel shares at $124 a pop… not to long later you couldn't get $0.50 for them. The underlying fundamentals are rotten, but no one seems to care as long as things keep going up.
Re: Mortgages: Yeah, they're a lot different up here. Most people go with the 5 year fixed rates here, which are like certain ARM-Hybrids in the US. Generally they have actually been very beneficial for Canadian borrowers because rates have been going down for the last 25 years, so every time they renew you end up paying about the same or less.
Unfortunately this has instilled a false sense of security in Canadians as all too often they do not consider the possibility of rates going up. And because of the CMHC, the banks have no risk, thus no qualms about letting people leverage themselves to the max on cheap credit.
Trouble is now we're on the cusp of a new paradigm, interest rates have bottomed out, they can no longer go any lower, and with governments suddenly running large deficits it's bound to force interest rates well up as the bond market floods, likely beyond the typical 6% people have become accustom to.
Not sure why our mortgage system evolved differently then the one in the US. You can get loans longer then 5-yr in Canada, most outlets at least offer 10-yr, and some 15-18yr (haven't seen any longer, but they may be out there)… trouble is that the rates go up significantly the longer the term. Just looking at BMO's current posted rates 5yr-5.84%, 10yr-6.95%, 18yr-8.95%… and that curve is usually even steeper.
Where as in the US their 30yr mortgage rates are usually very competitive, if not lower then our 5yr, obviously lending is much more competitive down south.
Like I mentioned, the 5yr terms have worked out well for Canadian borrowers the last 25 years as rates have generally been going down (I did a post on this subject awhile back http://edmontonhousingbust.blogspot.com/2009/04/mortgages-fixed-rate-mechanics.html)... but now rates have bottomed out, we're going to find ourselves running into the same problems the US had with ARM's, especially in 5 years when those that bought the last few months at all-time low rates get hit with whatever the rates of the day are in 2014.
Unfortunately most people don't put any more thought into their purchases then what their monthly payments will be. As long as they can afford it today is all that matters, which of course makes the conditions ripe for a bubble to form like it has. The consequences of interest rates rising or prices adjusting downward are completely lost of most, and will not become obvious to them until it's too late.
Yeah, unfortunately we Albertans (and Canadians in general) really like the "it's different here" narrative… even watching the destruction in the US from next door we're still largely blissfully ignorant of the phenomena.
Seems true for all bubbles, it was same during the dot-com boom, one day people were clamouring to buy up Nortel shares at $124 a pop… not to long later you couldn't get $0.50 for them. The underlying fundamentals are rotten, but no one seems to care as long as things keep going up.
Re: Mortgages: Yeah, they're a lot different up here. Most people go with the 5 year fixed rates here, which are like certain ARM-Hybrids in the US. Generally they have actually been very beneficial for Canadian borrowers because rates have been going down for the last 25 years, so every time they renew you end up paying about the same or less.
Unfortunately this has instilled a false sense of security in Canadians as all too often they do not consider the possibility of rates going up. And because of the CMHC, the banks have no risk, thus no qualms about letting people leverage themselves to the max on cheap credit.
Trouble is now we're on the cusp of a new paradigm, interest rates have bottomed out, they can no longer go any lower, and with governments suddenly running large deficits it's bound to force interest rates well up as the bond market floods, likely beyond the typical 6% people have become accustom to.
Not sure why our mortgage system evolved differently then the one in the US. You can get loans longer then 5-yr in Canada, most outlets at least offer 10-yr, and some 15-18yr (haven't seen any longer, but they may be out there)… trouble is that the rates go up significantly the longer the term. Just looking at BMO's current posted rates 5yr-5.84%, 10yr-6.95%, 18yr-8.95%… and that curve is usually even steeper.
Where as in the US their 30yr mortgage rates are usually very competitive, if not lower then our 5yr, obviously lending is much more competitive down south.
Like I mentioned, the 5yr terms have worked out well for Canadian borrowers the last 25 years as rates have generally been going down (I did a post on this subject awhile back http://edmontonhousingbust.blogspot.com/2009/04/mortgages-fixed-rate-mechanics.html )… but now rates have bottomed out, we're going to find ourselves running into the same problems the US had with ARM's, especially in 5 years when those that bought the last few months at all-time low rates get hit with whatever the rates of the day are in 2014.
Unfortunately most people don't put any more thought into their purchases then what their monthly payments will be. As long as they can afford it today is all that matters, which of course makes the conditions ripe for a bubble to form like it has. The consequences of interest rates rising or prices adjusting downward are completely lost of most, and will not become obvious to them until it's too late.
Thank god I came across your website! I was looking at a gorgeous place in Glenora Gates and my mom decided to google the name, up popped a bunch of sites, one being your blog entry from May regarding it! Are there any existing apartments/condos that you feel are great buys? If not that's fine, I will always be grateful for the heads-up
I'd be pretty wary of buying anything built in the last 5 years… and anything with stucco exteriors in the last 10.
I personally wouldn't be in any rush to buy a condo, they're very overbuilt. But if you must, I'd suggest looking into what those units were selling for in 2003/2004 and adding 25-30%… if you can find some in that range those would be safer then most out there. But IMO, I'd steer clear.
Any thoughts on all the CMHC news making rounds on the blogs?
Thanks for the response and I really these blog posts.
I definitely agree with you about what the rise in interest rates could do to the housing market. My newest guessing game is trying to figure out when interest rates will rise.