Get your own house in order

Debts and deficits are a familiar and alarming topic of public concern. Canada’s governments are frequent targets of criticism for their addiction to debt. But they are not alone. The governments of our own living rooms are equally beholden to borrowing.

A new Manulife Bank survey reports that about four in 10 homeowners admit to being “caught short” in the past year, that is, finding themselves with insufficient funds to meet expenses. Four per cent said it happened monthly. In essence, far too many of us are “house poor.” Our acceptance of this state of affairs is openly alarming. How did it happen?

The answer is at once simple and frightening. According to the report, Canadian homeowners carry an average of $181,000 in mortgage debt, up $6,000 in the past six months. Mortgage rates remain at historically unusual lows; as Garry Marr notes in the Financial Post, a five-year fixed-rate closed mortgage is now below 2.5 per cent.

It may seem that higher debt is reasonable, given lower interest rates. But the danger is obvious: interest rates will not be this low forever.

Instead of seizing the chance to buy suitable homes and pay the debt down fast, far too many of us have seized the chance to buy more house than we can really afford.

It is an understandable temptation.

When preparing for a major purchase, whether it’s a home, a car, or even a vacation, most people try to be realistic.

But since such expenditures are a big part of our lives, and our budgets, we want to enjoy them. And what with those little extra costs and incidentals we hadn’t anticipated, we wind up a bit overstretched. It’s normal; but, past a certain point, it’s also folly.

The housing market is an especially easy place to be foolish these days, because prices are high and rising. That little voice whispers that, even if we struggle to make the payments, we’ ll have a great house in a great neighbourhood with great resale value. Too often, we listen. While a prudently chosen house is a great asset, a poorly chosen one can become a crushing liability.

The $181,000 Manulife figure is an average that conceals wide variations among buyers and regions. In Atlantic Canada, just six per cent of homeowners are carr ying more than $250,000 in mortgage debt and just one per cent more than $500,000. Fully 27 per cent have no mortgage at all, and 35 per cent of less than $100,000. In Vancouver’s overheated market, 37 per cent of mortgages are more than $250,000 and five per cent over $500,000, while just 11 per cent of homeowners are mortgagefree and 22 per cent are under $100,000.

Given the starkly different economic conditions between east and west, it may be assumed that someone with a $500,000 mortgage in Atlantic Canada is among the small group wealthy enough to afford it.

In Vancouver, meanwhile, million-dollar homes are the norm and simply entering the market can demand frightening levels of debt.

But if you’re rich enough to afford the house, you shouldn’t need that big a mortgage.

No matter how high the income, an overstretched budget is a recipe for disaster once interest rates push repayments past the breaking point. A big income just means that much harder the fall.

Today’s artificially low interest rates cannot last forever. They may look attractive, but they depress the national savings rate on which borrowers depend. That includes Canada’s governments, which have returned to the nasty bind of needing cheap money to “stimulate” the economy and keep their own debt burden manageable, while fearing the housing bubble they keep inflating.

It may be easy to criticize government improvidence or foreign buyers for inflating the housing bubble while shrugging off personal responsibility. But in the end, Canadians will be the victims when the bubble bursts, just as Americans were when the sub-prime market exploded in 2008. We can protect ourselves by not buying more house than we can afford, or scrimping on other costs and reducing the outstanding balance as if our future depended on it. Because it does. And the funny thing is, if we each act prudently in our personal affairs, it will help protect the Canadian economy as well.

If by contrast we do not learn to say “No” to ourselves at the bank, the pain will only be delayed, and all the greater for the delay.