In a new report by TD Bank, Chief Economist Craig Alexander warns that if interest rates remain stable and there is no further tightening of mortgage rules, the debt-to-income ratio could reach 160% in the second half of 2013. That marks the peak reached in the US & the UK before their real estate markets plunged.
The report goes on to say that Canadians are becoming more leveraged and are more vulnerable to an economic shock than they were heading into to the 2008/2009 recession.
By TD’s estimation, interest rates are currently at least 2% lower than what would be considered a non-stimulative environment and the problem lies therein:
To be clear, there is good reason to believe that Canada has avoided the imprudent borrowing and lending decisions in the United States, but this does not rule out the possibility – the likelihood in fact – that Canada will experience a housing correction when interest rates do eventually return to more normal levels.
Given the fact that Canadians are increasingly viewing the prevailing level of interest rates as normal, there is an extremely high probability that it will be very unsettling to Canadians when interest rates do rise, even if they do so gradually.
TD also recommends that the government take action to temper personal debt growth by tightening mortgage insurance rules further whether it be by lowering the maximum amortization to 25 years or testing all mortgage loans at the 5-year posted rate, among other options.
The report concludes:
Make no mistake, the economy will take a hit when it has to be weaned off the drug of exceedingly low interest rates. The goal should be to limit the effects of withdrawal as much as possible.
You can read the entire report here