Household Debt vs. Mortgage Debt: The Good, The Bad, & The Ugly

After the two stories from Monday’s blog, and my obvious dislike of the new mortgage regulations implemented on January 1st, I think you all have an idea where this is going.

While not exactly about real estate, those stories did serve a purpose in the conversation about debt in Canada, which of course, is a major driver of real estate prices.

Allow me to open today’s blog with a third story, and then explain where all this is going…

Debt Blog-01

Do I tell a lot of stories about my mother on TRB, or what?

Hey, I’m just like any other 37-year-old who thinks that his mom is the best mom ever.

And don’t wives just love that about their husbands?

My mother, if I could describe her in a word, would be simple.

That word could take on many meanings, but I’m using it in a sense that she’s content, uncomplicated, easy-going, happy-go-lucky, easy-to-please, and the like.

For years, she had an old-school “box” television, when just about everybody on the planet had a flat-screen.

Around 2009, I showed up at her door one day with a 42-inch flat-screen, and she looked at me like I was crazy!  “I don’t need this,” she told me.  But it was too late.  I was already inside installing it.

Last year, on Black Friday, my Mom was grocery shopping at a Scarborough mall, and she called me upon returning home.

“David,” she asked me, “Do you think I need a new TV?”

“Do you want a new TV?” I asked her.  “Does your TV work?  Is it large enough?” I asked.

“Yes, yes of course.  It’s not even ten years old!” she said, showing why I think she’s so content.

“So then why are you asking, Mom?” I inquired.

“Well,” she told me, “I was at Metro today, and there’s an big-box store next door.  There were all kinds of people streaming out of the front door with massive TV’s!  All these people, wheeling out 60-inch Sony’s and Panasonic’s in grocery carts and loading them into their cars!”

“So what does this have to do with you?” I asked.

“It just got me thinking,” she explained, “All these people are buying these massive TV’s on their credit cards!  I even went inside and watched them!  Then they come out and put them in their beat-up old cars.  I just sort of thought, well, if they can afford a new TV, then should I get a new one too?”

I love my mother dearly.  She’s just so cute, so simple, so well-intentioned.

And she couldn’t help being susceptible, seeing other people absorbing all that consumerism has to offer, and she was wondering if she should follow suit.

“Mom, you’re almost 70-years-old,” I told her.  “You’ve been working since you were nineteen.  You have an RRSP, and a pension, and your monthly expenditures are minimal.  You can afford a new TV, but do you want one?” I asked.

There was a long pause, and she said, “No…not really,” and laughed.  “Nevermind,” she said.  “It was just a thought.”

Just a thought, there, in that moment.

But I can’t tell you how many times she and I have come back to that story, and how many times we’ve talked about this in the context of consumer debt.

Back in May of 2017, the International Monetary Fund (IMF) issued a warning to Canada regarding both housing, and household debt.

In response, Finance Minister, Bill Morneau, said the following:

“What the IMF has said is … that there’s a level of household indebtedness in Canada that is significant, something for us to watch. The housing market, of course, is something we’re paying close attention to.”

In September of 2017, Equifax Canada reported that non-mortgage debt rose 3.3% in the second quarter of 2017, to an average of $22,595 per person.

In November of 2017, The Organization for Economic Co-operation and Development (OECD) warned against the rising level of household debt in Canada, which was among the leaders in the world.  They noted that consumer debt topped 100% of Gross Domestic Product in Canada.

In December of 2017, Statistics Canada announced that debt as a proportion of household disposable income increased to 171.1% in Canada, which represented an all-time high.

There is, without a doubt, no question that Canadians are taking on too much debt.

But what kind of debt they’re taking on, what kind of debt they should scale back on, and what kind of debt is acceptable based on an individual’s circumstance, isn’t something the government seems to be interested in.

As I alluded to in Monday’s blog, I believe that there is “good” debt, and I believe that there is “bad” debt.  And if you want a simpler and more agreeable way of looking at it, let’s just say that there is better and worse debt.

While you might be quick to suggest that if I were to claim that mortgage debt is “good debt,” it’s only because I sell houses for a living.  If that’s your assertion, then you haven’t been reading TRB for long.  But if you need more convincing, then let me explain.

What I was talking about on Monday had more to do with “financial literacy” than it did with debt, since I was identifying that most people in society today aren’t competent enough to run their own personal finances.

So if the government – and it’s an “if” depending on how you view the government, and their role, is going to tackle household debt, then where do they start?

When I look at debt, I look at several features prominently:

1) Interest rate
2) Amount
3) Security
4) Purpose
5) Term

When we think of debt, some of us look at the purpose first, ie. mortgage debt, credit card debt, student loan, construction loan, refinancing, etc.

But then some of us consider the interest rate first and foremost, since that’s really what debt is all about.

What about the term, ie. how long you have to pay it back?  And what about the conditions associated with the payback, and penalties?

And is the debt secured?  Like a mortgage, is there a hard asset to which you can tie this debt?

Do you care about the amount?  Will you suggest that taking on a $500,000 mortgage at 2.99%, for a $650,000 purchase, is more or less threatening than putting $10,000 on your VISA at a 29.99% rate?

And it’s that latter question where many of us would begin to disagree.

Everybody has his or her own idea of the purpose of debt, as well as a risk tolerance, and that “I need to be able to sleep at night” sanity-check, that really separates people in the example of the $500,000 mortgage versus the credit card balance.

You already know how I feel about the implementation of the “stress-test” in the mortgage market.

But let me tell you why.

Debt has always existed in society, and always will.  And while debt exists, it’s affected by both rules that governments enact, as well as the desires of individuals borrowing.

The desires of individuals, can be affected by the rules that government enact.

And therefore the end result is the ability of individuals to borrow, in certain amounts, with certain terms.

While I’m not a huge fan of the government intervening in free markets, I think that if they have a mandate, it has to make sense.

The banking system in Canada has never been safer, and the lending space in which banks lend, has never been as tight.

And yet in society today, exist many individuals who take on far more debt, at far higher rates, than the paltry 2.99% that Joe Average pays down, secured against his home, with his 20% down payment.

Consumer debt is the worst kind of debt.  It is the “bad” debt I speak of.

Take the average Canadian, and hand them a VISA with a $5,000 limit.  What they do with that $5,000 in front of them will be affected by their level of financial literacy, and their level of self-control.

People don’t need new flat-screen televisions to replace their slightly-older, slightly-smaller flat-screen televisions.  But with low levels of both financial literacy, and self-control, they seem to be buying these things in droves!

Should the government monitor the purchase of flat-screen televisions?  Of course not.

But should the government be more involved with how credit card companies operate, how they lend, what their lending criteria is, and so forth?

Ordinarily, I’d say “no.”  I really don’t care what other people do with their money.

But here’s my issue, folks.  If the government is going to make it more difficult for buyers of real estate who have saved a 20% down payment, after paying taxes, to qualify for a loan, then why aren’t they heavily involved in all the other areas of consumer debt, that have far higher rates of interest, and far lighter lending standards?

Have you ever gone to a Leafs game, and seen the table and the banner for MBNA Mastercard, where signing up for a credit card gets you a free t-shirt?  Ironically, one that you’ll probably never wear, because it has advertising on it?

Who’s fault is it when somebody signs up: the person offering the card and the t-shirt, or the person signing up?

If you said the latter, then I agree, whole-heartedly.

But what about when these companies set up shop on university campuses, targeting 18-year-olds with no financial literacy?  Is it a different situation then?

What if a credit-card company specifically targeted the poorest, and least-sophisticated members of society, demographically and/or geographically, and set up shop right there, wherever “there” is?  Is that a different situation?

Or is this all business as usual, whereby the government need-not take notice?

Have you ever heard those annoying radio ads for a credit agency where the voice on the radio keeps saying, “Approved”?  It’s annoying, but catchy, and I’ve heard it so many times, that I know it’s for Alpine Credit.

They advertise that you’re automatically approved so long as you own your own home.

How many of the people listening understand the concept of “equity,” and that a $100,000 in cash sitting on your kitchen table, and a $500,000 house with a $400,000 mortgage, both represent the same thing?

How many people are going to Alpine Credit to accept worse lending terms than what is provided by their bank?

And who believes that if the bank won’t qualify you for a home equity loan, that a company advertising on the radio is going to do anything but rake you over the coals for that “loan for college tuition, or to start a business,” as their website advertises?

How regulated are those companies with their loan criteria?  Where’s the upheaval over that?

What are the rates of interest, and the loan-to-value ratios, charged outside the “normal” lending sphere?

Sure, a bank might only loan 95% LTV.  But other lenders will loan 100%.  Or 120%.  Or 150%.

Somewhere, there’s a guy selling used jewelry, who also loans money that is secured against your home, for an amount well above the property’s value – at absurd rates of interest.

Are you familiar with usury?

It’s the practice of making immoral monetary loans, often unethical, that are absurdly in favour of the lender, and seek to exploit the borrower.

Many countries have their own usury laws, and Canada is one of them.

Section 347 of the Canadian Criminal Code makes it a criminal offence to charge more than 60% interest per annum.

That’s absurd, right?


We were just talking about a 2.99% mortgage, and a 30% rate on a credit-card.

Now we’re talking about 60%?

Short-term loans have skirted the usury rules in Canada since their inception, and the government, while implementing new legislation in both 2006, and 2018, has really yet to do anything tangible about this problem.

“Problem,” if you see it that way, of course.

But if we’re going to call putting 20% down on a condo purchase without qualifying at a rate that’s 2% higher than the contract rate, a “problem,” then so is 14,000% effective annual interest.

Money Mart, Payday Loans, Cash Money – all of these cheque-cashing and short-term loan operations are charging criminal rates of interest, that are beyond comprehension.

The interest rate doesn’t surpass the 60% usury threshold.

But if you consider the additional fees, and annualize the amounts, we’re getting into the thousands of percent range.

And just think: before 2006 in Canada, there was nothing in the Canadian Criminal Code about the short-term loan industry!

In 2006, a class-action lawsuit against a short-term loan operator made it all the way to a provincial supreme court.  Take a look at this:

On August 14, 2006, the Supreme Court of British Columbia issued its decision in a class action lawsuit against A OK Payday Loans.   A OK charged its customers 21% interest, as well as a “processing” fee of C$9.50 for every $50.00 borrowed.  In addition a “deferral” fee of $25.00 for every $100.00 was charged if a customer wanted to delay payment. The judge ruled that the processing and deferral fees were interest, and that A OK was charging its customers a criminal rate of interest. (Wikipedia)

That case caused each individual province to enact their own legislation dealing with short-term loans.

In 2016, the average payday loan in Ontario was $435 over 16 days.

It’s absolutely predatory, and the government, apparently, has set it straight.

Ontario enacted the Payday Loans Act in 2008, to limit the fees charged in loans in Ontario to $21 borrowed for a period of two weeks.  The effective annual interest rate was 14,299%.

Effective January 1, 2017, the maximum total cost of borrowing for a payday loan was reduced to $18 per $100 advanced (7,383%).

Effective January 1, 2018, the maximum total cost of borrowing was again reduced to $15 per $100, or 3,724%.

So while you might suggest, “David, the government is doing something about these predatory lending practices,” I still point to the 3,724% rate, and compare it to the 2.99% rate on a 5-year mortgage – the latter of which the government has sought to make more difficult to obtain!

And the irony is, the very people in society today that the government is trying to help, are often the ones most taken advantage of.

My wife is a social worker, and many of her tenants receive government cheques every month for assistance.  The problem is: many of the tenants don’t have bank accounts, as they are either turned down by the banks, don’t have the requisite identification, are mentally incapacitated and incapable of opening and operating an account, or in some cases, are just too goddam lazy.

So where do these people go to turn their government cheques into dollar bills?

You guessed it.  Money Mart, Payday Loans, and Cash Money.

You would think if the government were giving away our tax dollars, they might do a better job ensuring it arrives, in whole, at its intended destination.  But no.  Every time a cheque is issued to one of these poor folks, 15% of it immediately goes to a cheque-cashing boutique.

So after discussing credit cards companies, private lenders, home-loan experts, short-term loan operators, what is my point?

Blog reader Ralph Cramdown wrote on Monday’s blog:

Here’s David, who plays a swashbuckling free marketeer whose government is too big and too intrusive 364 days a year. And today he says the government’s role is to serve and protect the people from those dastardly forces of supply and demand of consumer credit?

Totally fair.

I’m not a fan of big government, and I’m not a fan over over-regulating.  I’m really not interested in any of this government intervention.

But my point is that if the government wants to do something about debt, then stepping into the safest, least-vulnerable space in the market – those with a 20% down payment, and making it harder for them to obtain a mortgage is not the way to go about it.

Remember the quote from Bill Morneau:

“What the IMF has said is … that there’s a level of household indebtedness in Canada that is significant, something for us to watch. The housing market, of course, is something we’re paying close attention to.”

So where is Mr. Morneau “watching the level of household indebtedness?”

Blog reader Libertarian wrote on Monday’s blog:

Sadly, I believe that financial literacy will get even worse because Trudeau and Wynne have made it their mission to take care of every one. “Don’t worry about earning income, we’ll increase minimum wage. Don’t save for retirement, we’re expanding CPP. The gov’t will take care you at every step along the way. Just sit back and relax.” Yikes!!

It’s as though the words came directly from my mouth.

This government, at both levels, seems to be completely unwilling to rock any boats, to address any problems when they arise, but rather want to patch them up once they spiral out of control.  In most cases, that means raising taxes, creating new taxes out of thin air, and refusing to earmark tax dollars for long-term projects that voters won’t “feel” during a given politician’s tenure (ie. a 25-year transit plan).

Don’t even get me started on the public education system in Canada, specifically Ontario, which I believe has become a race-to-the-bottom, placating the lowest common denominator, in attempts to provide a forced equality that goes against human nature.  But, I will say that I have no idea why there isn’t a mandatory, province-wide Grade 12 course called “Personal Finance.”  Probably because the people who set the curriculum don’t understand their own personal finances, and are too busy bubble-wrapping the playground.

I believe that if the government is going to tighten the safest lending space there is, then they should simultaneously be looking at predatory lending among recognized credit card companies, seriously consider instituting true usury laws for short-term loan providers like Quebec did, and making financial literacy the cornerstone of today’s high school education.

Otherwise, they’re guilty of selectively creating legislation, in part to show voters they’re “doing something” about a perceived problem (that they can’t fix), but primarily because it’s the lowest-hanging fruit.

Okay, you guys have heard enough from me on this.

And while this is a real estate blog, I pride myself on providing important, timely, and thought-provoking content, and this is exactly that.

On Friday, I’m going to sit down with my mortgage broker to get his thoughts on the matter.  If you’re interested, email me with direct questions and we’ll have them answered.


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  1. Randa says:

    This is so well written and I always said this to myself. Our government is not concerned with consumer debt and credit card lending practices. It focuses instead on mortgage lending.

  2. lui says:

    Canada must acknowledge especially in Vancouver foreign buyers are driving up prices which makes affordability for most young Canadians out of reach and time to stop them from using real estate as safety box for their money.Ottawa bringing in the stress test only hurts Canadians trying to get into the market.Debt is good if the borrower can manage the cost.The reason there is so many Money Marts is there is a need for them like it or not.

    1. Appraiser says:

      According to the latest report from CMHC and Statistics Canada:

      “The new CHSP data show that non-residents owned 3.4% of all residential properties in Toronto and the assessed value of these properties accounted for 3.0% of total residential property value in that CMA. In Vancouver, non-residents owned 4.8% of residential properties, valued at 5.1% of total residential property value.”

      “Estimates of non-resident ownership varied across housing types. In both CMAs, non-resident ownership was more prevalent for condominium apartments. Non-residents owned 7.2% of condominium apartments in Toronto and 7.9% of these units in Vancouver. By comparison, 2.1% of single-detached houses in Toronto, and 3.2% of single-detached houses in Vancouver, were owned by non-residents.)

      NOTE: A non-resident is defined as those individuals who reside out of the country for more than six months per year, even if those individuals are Canadian citizens. (

      1. Chris says:

        “4.8 per cent of the housing stock is owned by “non-residents” in Vancouver and 3.4 per cent in Toronto – roughly 36,000 housing units in Vancouver and 56,000 in Toronto. Nothing to sneeze at.

        Second, the release provides data on the “stock” of non-resident ownership – the share of all existing property – but little on the “flow.” When it comes to housing prices today it is the “flow” that matters more – those currently participating in the market.

        The most telling “flow” data are the non-resident ownership rates of condos completed in the past two years. This is striking: 16 per cent of newly built condos are owned by non-residents in Vancouver and 12 per cent in Toronto.”

  3. Libertarian says:

    Thanks for the quote David!

    Since you’ll be talking to your mortgage broker, may you ask him whether he still has this opinion:

    “I think that attacking mortgages and claiming they are a bad debt is a bit of a strawman argument.
    It makes for good headlines and politics but the fact of the matter is, the Canadian economy relies very heavily on the housing market. From realtors, to mortgage brokers, to builders, contractors, and suppliers, Canada’s real estate industry is MASSIVE. It would be prudent to ensure it is as safe as possible. And while some disagree with HOW the government is regulating the housing market, there’s no doubt that it should be regulated for the sake of our economy.”

    Granted, that your mortgage broker’s son – a few months ago on your blog about B20.

    As others have pointed out, I think B20 is more about the gov’t not wanting to ever have to bail out a bank or CMHC. Yes, a side effect is that consumers can’t blow their brains out buying real estate, either their primary residence or investment properties. I know there are a lot of commenters on this blog who are of the opinion that it is impossible to blow your brains out on real estate because prices in Toronto will go up forever, but there is a risk (however small) of a black swan event that could result is a large number of defaults. The domino effect from that would be severe, hence the need for regulations, as the mortgage broker says.

    Plus, in my opinion, being “house poor” is an example of being financially illiterate. There’s more to life than housing and other ways to be able to retire comfortably when the day comes.

  4. Condodweller says:

    “Will you suggest that taking on a $500,000 mortgage at 2.99%, for a $650,000 purchase, is more or less threatening than putting $10,000 on your VISA at a 29.99% rate?

    And it’s that latter question where many of us would begin to disagree.”

    The reason everybody has their own idea about debt is because everybody’s financial circumstance and comfort level for risk are different. A person who uses a mortgage for strategic reasons rather than necessity to borrow 500k would say it’s good debt while another may consider even a 200k mortgage that he/she can barely afford bed debt. The correct answer is it depends.

    While I agree that debt, when used strategically can be used for good, I would still not label it good debt. I agree with the person who said that the only good debt is when you are the lender. But that’s not to say that the people who promptly attacked him/her were entirely wrong. I think the sane thing to do in this case is to agree to disagree. I also agree that the term “good debt” was invented by the financial industry to make people comfortable with taking on more debt.

    I stayed out of the fray and watched the melee unfold after Monday’s blog which was quite entertaining. I feel sorry for the person who came to read the blog post and the comments to try and find an answer on how to handle his/her personal situation. I know David likes to set the fire and walk away however in this particular case it really does not serve any purpose.

    David may protest that he is not complaining about the government reducing his client pool through punitive regulation while not doing enough about a competing industry, however, he must realize the optics of it. When he directly compares the two and tries to label one good and the other bad it does not look convincing even if it is true. These posts would have felt much more sincere if he only wrote about consumer debt and the predatory practices of the financial industry. It would have helped if he attempted to offer a solution or at the very least link some personal finance websites where his readers could go for help.

    His blaming the consumer in trouble also leaves a bad taste in my mouth as there are less intelligent/educated people out there who go for the shiny object every time without thinking through the consequences when faced with a manufacturing industry and their marketing machine which is increasingly using psychology and understanding how the brain works to rope people in to spend more and never be satisfied with what they currently have that they may have only bought a few years ago. This exactly the same thing as what David wrote about purchase offers being stacked against the buyer.

    My take on consumer debt is that it’s not the financial industry’s fault. They sure are the enablers but the deck is heavily stacked against the consumer and I would not blame the weak for succumbing to aggressive marketing strategies. What can be said when you have companies like Apple where people are willing to camp out to buy their products when the current one you have should be just fine if they just hadn’t purposly slowed it down for you to feel bad about it and feel the need to buy the new one of $1000+. That, should be criminal and regulated more than payday loans.

    If anyone is looking to understand human behaviour and how it affects their spending habits I would highly recommend David Chilton’s follow up book The wealthy barber returns. I was skeptical as he was recommending mutual funds in his first book, however, I got it as a gift and when I read it I was pleasantly surprised. He admited that he was wrong in the first book and he has some great chapters on spending habits, why we do it, what we can try to do about it.

    1. Andrew says:

      “David likes to set the fire and walk away.” Or maybe after writing two blogs in three days that are longer than what newspaper columnists write in three months, he went back to work at his JOB instead of responding to troll-like comments all day.

      Sheesh. There’s a real Howard Stern effect going on with this blog. You hate him and yet you just spent ten minutes and wrote a 400 word response.

      1. Condodweller says:

        ” “David likes to set the fire and walk away.” Or maybe after writing two blogs in three days that are longer than what newspaper columnists write in three months, he went back to work at his JOB instead of responding to troll-like comments all day. ”

        #1 I am pretty sure David has used that phrase before I was simply using the same. #2 According to him, he has no activity and lots of time to write these articles. #3 All those words he used could have been used to write differently with no extra time spent. #4 I don’t know where you get the idea that I hate him. I provided constructive criticism and provided my thoughts on the topic which is more than I can say about your comment. #5 You could have responded to or debated any of my points in my comment on this important issue yet you have decided to add exactly 0 value to the conversation. #6 I’m not sure where you get the idea that I was expecting a response but I’m sure he will appreciate you speaking for him.

        That’s six strikes. I’d say your post is more troll-like than mine.

  5. A says:

    Good article, David. However, I do not completely agree with you.

    IMO, the B-20 thing was always about systemic risk to the banking system and not necessarily about “testing” the borrowers. If you approach it from that perspective, the payday loan argument weakens.

    Arguably, all the people with the $5k VISA bills may not pose a systemic risk as a whole but it would not take all the mortgagors (and guarantors) before a systemic risk arises for mortgages.

    On the financial literacy thing – I completely agree. As CNBC’s Cramer says, you can be a Econ major having a college (or uni) degree and yet know nothing about personal finance. This is a shame for both US and Canada.

  6. Kramer says:

    Great post David. Overall I agree with you. Payday loans keep struggling people down… people become reliant on them, form habits, and the compounded effect on people can be absolutely disastrous.

    I’ve been struggling with the OFSI topic because of the “why?”. Things don’t add up perfectly on the surface, and it has caused a ton of debate and anger.

    Then this “narrative” (I hate that word) crossed my mind:

    First of all, and most crucially: Is the new OFSI rule the most obvious signal of all time that the interest rate (and hence the fixed rate on mortgages) is ABSOLUTELY going up approximately 2% over the next 5 years? This doesn’t seem absurd. Some may say this sounds obvious.

    But would that even matter for 5-year fixed mortgages? After all, if you qualify at 3.00% for 5-year fixed… for 5 full years it doesn’t matter if you could pay more than the 3.00%, and you’re paying principal off. In fact, in the first 5 years of your mortgage, assuming a 25-year initial amortization, you pay approx. 15% of the mortgage principal off.

    BUT… if after the first 5 years, you are going to renew and the best you can get is another 5-year fixed with an interest rate 5.00%… despite you having paid down your mortgage principal by 15% over the 5 years… YOUR MORTGAGE PAYMENT WILL BE 19% HIGHER.

    It’s this 19% number in particular that haunts me, and possibly starts to complete the puzzle.

    If the government ABSOLUTELY knows that 5-year fixed mortgage rates in 5 years from now will be approximately 5.00%… then without action, we would be counting on EVERY January-2018-onward buyer to be able to afford a 19% larger mortgage payment in 5 years from now, while the % of income being spent on housing is ALREADY at very high levels…

    Yes, many people will be able to afford a 19% higher payment in 5-years from now:
    – those who already could today, and…
    – those who will be able to because in 5 years they will be making a more money through steady employment and salary increasing at a rate of about 3% per year, which is a rough standard basically.

    HENCE: IS THIS NEW RULE SINGLE-FOCUS-AIMED at people who do not anticipate meaningful wage growth in the next 5 years.

    Is it this rule in fact all about them, BUT unfortunately caught in the crossfire are people who absolutely will be able to afford 19% higher payment in 5-years, but cannot prove it today what their salary will be in 5 years, and it is obviously impractical/impossible to let the banks decide that for themselves when reviewing an applicant.

    As an aside… age wise, some first time buyers will want to have kids in 5 years… is a bonus of this rule ensuring that some short-sighted people won’t face the decision of a) keep their home with their 19% higher salary OR b) have children.

    CONCLUSION: If someone can afford a property today, but there is a 99% chance that they will not be able to afford the payments in 5 years (because the gov’t’ has forecasted a 99% likelihood of a approx 2% increase in rates over approx. 5 years)… then how would you “stop these particular people” from buying that property?

    And would you care if you upset some people whose ability to carry the mortgage in 5-years was dependent on unproven meaningful 5-year wage GROWTH (not just a stable income)? And would you secretly think you’re doing some of them a solid because in 5-years they would be facing the question of keep the house or have kids.

    Coming back circle… this is all dependent on the first point… Is the new OFSI rule the most obvious signal of all time that the interest rate (and hence the fixed rate on mortgages) is ABSOLUTELY going up approximately 2% over the next 5 years?

    Sorry for the book, but this all makes me feel better about the rule.

    Feel free to pick this apart people, I seek only the truth and understanding so I can bloody-well be ahead of it.

    1. Chris says:


      Good post, and thanks for doing the math on the renewal.

      The wage growth part is also interesting, as over recent history, it hasn’t been exactly stellar.

      The only part I question is if interest rates will absolutely go up 2% over the next 5 years. Personally, I think they will continue to climb, but I wouldn’t be so brave as to say where they will be in 5 years…that’s a tough call to make, with a lot of unknowables in the equation. I suspect the OSFI stress test is in recognition that interest rates are beginning to climb, and to make preparations should they go up 2% over the next 5 years. This way, if it happens, buyers have been stress tested as able to cope with it.

      Anyways, interesting thoughts!

      1. Kramer says:


        Maybe it’s more something like: there is now a SIGNIFICANT ENOUGH probability that rates will be 1.5%-2.0% higher in 5 years (based on ‘the forecast machine’ and ‘possible scenarios’)… yada yada yada, hence there is a SIGNIFICANT ENOUGH probability that in 5 years, any household WITHOUT X%+ household income growth will absolutely be in jeopardy. I don’t know.

        The key ingredients are:

        Some kind of now certainty or high probability about future rates
        the impact on mortgages payment 5-years from now
        the size of the group of new home buyers whose household income will not meaningfully increase over 5 years. .

        It can’t just be arbitrary… it can’t just be “to tighten things up”… This particular action/strategy hits PARTICULAR GROUPS. It is targeted… and possibly wisely so.

        1. Kramer says:

          I do think it is unfair that some people who WILL be able to afford higher payments in 5 years are caught in the crossfire and impacted. This is not fair, as one’s future in their career and their ambition is usually a bit of a safety net or cushion or upside… for them, this new rule is kind of making a capital budgeting decision for them, protecting them against the possibility that they do not grow their salary, etc.

          I would say there is more of a possibility that one will not grow their salary (even if they expect to) than there is the possibility of someone losing salary they already have.

          – worry about people who are highly unlikely to have meaningful salary increase – MAIN OBJECTIVE
          – worry about people who might (but who will not certainly) have meaningful salary increase – SIDE OBJECTIVE
          – help shortsighted first timers with meaningful increase to not face financial strain if they decide to have kids – BONUS SIDE OBJECTIVE
          – a sincere apology to the people who WILL have meaningful salary increase but can’t prove it today – CAUGHT IN CROSSFIRE

          And do not worry about people losing salary. So if you can afford 2% higher today, go for it. You’re unlikely to lose that salary, and there is the chance of upside on your salary.

          If you can’t afford 2% higher today, the fact that you MIGHT be able to in 5 years doesn’t make the cut in this interest rate environment and forecast.

          I’ll shut up now.

          1. Chris says:

            Valid points in both of your previous posts.

            It’s unfortunate for those caught in the crossfire but I suppose the thought process is that it is for the greater good of increased systemic stability.

            Government giveth and government taketh away.

    2. Ralph Cramdown says:

      The thing is that real estate is the largest cyclical driver of the economy, and is reflexive (i.e. positive feedback loops; increasing prices cause increasing prices and a better economy, and vice versa for decreasing prices/worse economy). There were a lot of people in the US whose jobs and mortgages would have been just fine, except that the people who were more “on the edge” defaulted and/or lost their jobs, which caused lower house prices, more defaults and job losses, etcetera.

      So using a stress test to protect people who would default if rates are 2% higher in 5 years doesn’t just protect those people, it also protects the people who could handle the 2% increase, all other things being equal, but would default if rates rose 2% and the first group defaulted and the economy took a dump…

      1. steve says:

        This is exactly the reason for the 2% qualification initiative … protection for the greater market participants (as well as the banks)

    3. Joel says:

      One of the problems that I see here is that is people can not afford their mortgage after the 5 years they are not going to sell. Most people will refinance to a longer amortization.

      In doing so they will be paying down their home much slower than anticipated. This will cause many people yo lose the equity in their home that they were using to supplement their retirement.

      If this is the case this could prove to be a very big disaster for the economy 10-20 years down the road.

      Another stupid point of the new rules is that it is now easier to qualify for a variable than a fixed. This will put those who are stretching the most in trouble should the rates rise in the future.

    4. LawrencePark says:

      FYI, it’s OSFI, not OFSI. Great post, though.

  7. IanC says:

    Ontario education started crapping out when Harris and his cronies removed Dinosaurs from the elementary curriculum. It was amazing to see kids in grade one be able to spell triceratops. Oh well, so much for science.

    Oh Yeah !

    1. LLB says:

      I remember when we had exams in seventh grade. Now they barely even get grades. Sigh! If only my kids’ private school tuition was tax deductible.

  8. Pete says:

    I think you’re completely obfuscating the point of the mortgage stress test with the payday loans comparison. Sure the interest rates are ridiculous for payday loans compared to mortgages. But people aren’t going to lose their homes if they don’t pay back a $100 payday loan. House prices won’t fall drastically if interests rates rise on payday loans, but they will if mortgage rates fall. We’ve seen reports that like this : stating almost 1 million Canadians couldn’t afford their mortgage if there was a 1% rise in interest rates. So to claim that the mortgage rate stress test is less important than payday loans is a false comparison.

  9. Dan says:

    Good blog post and I agree with your thesis.

    The topic of pay-day lenders is obviously a tricky one -combating criminal enterprise but at the risk of ridiculous interest rates. A lesser known fact is that with Federal cheques, you can actually cash them at any bank, whether or not you have an account there. I’m not sure if the same is true for provincial cheques

    Just a note on the points you raised post Libertarian’s comment regarding financial literacy education. Ontario has introduced financial literacy education. It is integrated throughout the curriculum from 4-12 ( and is also a stand alone part of the careers course in high school

    Obviously this will not change anything overnight, but is a step in the right direction and we likely won’t actually realize any results in the next decade or so.
    Federally, the Harper government introduced and has continued under Trudeau several initiatives at the Federal Level to improve Canadians financial literacy.

    1. Kyle says:

      Thanks Dan for confirming that.

      I seemed to recall decades and decades ago, when i was a part-time bank teller in high school, that i used to cash assistance cheques for people without accounts. Was going to post but wasn’t sure if i was misremembering or if times had changed.

    2. Condodweller says:

      @Dan Thanks for posting those links. I have heard about plans to include financial literacy in the school curriculum, however, I hadn’t realized the pilots have started.

      I will have to check the link about federal cheques and whether they are guaranteed by the government in order to avoid the holding period. I suspect people on social assistance don’t have the luxury to wait a week after they deposit the cheques. I know I was pretty annoyed by the holding period when I learned about them while in high school when I had to wait a week for my paycheque to clear from one of the big franchise companies. I would go to my branch, line up for half an hour, (pre ATMs and my bank was horrendous for lineups), and after depositing my cheque I was not allowed to withdraw $20 as my balance was close to zero by then. I used to only get three hour shifts as a student in order to avoid having to give us a break. I guess some things don’t change!

      But imagine my surprise when I went into a different bank where I was not a client and they cashed my cheque no problem. They said it was from a trusted large international company and I suspect the amount was so small they had no issues cashing it. Line of credits are great to negate the holding period.

  10. Professional Shanker says:

    If the other forms of financing/lending where not available, i.e. short term/alternative credit options, house prices would not have increased in the manner they have – there are all interconnected. That said, without the ability to refinance consumer debt into mortgage debt, then people would not have had the ability to increase their consumer debt, which may have been used for investing in equities, which then starts the vicious circle again, but over the past 10 years this practice has been a net positive to household net worth.

    They are all interconnected and David you are correct in your assertion that the government should be looking at predatory lending practices but one thing is for certain and that is that the appearance of stability in financially regulated mortgage lenders will be the most important fact when a massive credit expansion cycle slows – this is what these changes are about, insulating the banks and protecting themselves against fighting for market share they do not want at the top of credit cycle.

  11. Mat says:

    Hi David, i came across your blog a few weeks ago and its now one of my go toos. Great Job!!.

    I believe financially literacy in highschool is a key missing component in todays education. It’s the one subject that everyone will use throughout their entire lives no matter what field of work they get into. Implementing this and repeating it over and over again to students will change the future of human consumption. What good is calculus or chemistry if you don’t get into a related field and use it everyday. I took those classes and don’t remember shit because i haven’t touched it in 15 years. The school system needs to change to include every day/real life education. Its actually really sad that people are just starting to figure this out

    1. Kramer says:

      I could not agree with you more.

    2. Not Harold says:

      Calculus gives you the ability to analyze the area under a curve and thus give you the cost of a mortgage in a terse, easily computable equation.

      That you don’t have the intellectual capacity nor curiosity to understand this demonstrates that we should have a hard filter in grade 6 where people who are incapable of gaining skills are shunted while the educable get a real education and we can put Calculus into grade 7 where it belongs rather than grade 12.

      1. Condodweller says:

        @Not Harold That’s a bit harsh. Considering we are just now starting to add fin. lit. to high school curriculum, they wouldn’t have been able to teach you how to calculate a mortgage since they wouldn’t have had any idea what a mortgage was. I didn’t learn about them until near the end of high school and we were taught how to calculate flow rates, maximum beam length you can get around a corner of a corridor x feet wide and other useful things rather than how to do mortgages.

        I agree we should hold back kids who can’t pass a course rather than lowering the standard for everyone else. We are not doing any favours for either group.

  12. Ralph Cramdown says:

    What this two part series reminds me of:

  13. Appraiser says:

    According to a article from December entitled B20 Backfire: So people affected by the stress test will do one or more of the following:

    Take 30-year amortizations
    …thus paying their mortgage off slower and staying in debt longer
    Choose a more expensive, non-federally regulated lender
    …thus staying in debt longer
    Remain captive to their lender at maturity, paying notably higher renewal rates
    …thus staying in debt longer
    Select shorter and riskier mortgage terms to qualify for a bigger mortgage
    …thus increasing their exposure to rate hikes
    Leave debt that they can’t consolidate on high-interest credit cards, loans, credit lines or second mortgages
    …thus staying in debt longer.
    This is supposed to make the market safer.

    Hers’s a response to the post from Peter M

    Peter M says: December 21, 2017 at 09:29 AM
    So in an effort to stabilize and strengthen the housing market, the government’s new rules are likely to increase amortizations, increase debtloads, take away refinancing options, and likely drive more borrowers to unregulated and alternative lending sources?

    This logic can only make sense in Ottawa’s political circles.

    1. Ralph Cramdown says:

      So the new regs are going to change borrowers’ risk appetites? I doubt it.

    2. Not Harold says:

      The actual purpose is to protect the financial system and the government from a cascade of defaults.

      Feds don’t want too many people calling on CMHC insurance, nor do they want to have to bail out one of the Big 5 and a half nor one of the massive insurers that has substantial consumer mortgage exposure.

      It’s not about individuals debt service nor even the health of the housing market, just what kind of a cheque the feds would have to write and possible contagion.

      Private lenders know they’re in a risky business and are charging enough so they should be protected. Them failing isn’t a problem for the feds or the financial system. Could be a bad recession but nothing panic worthy.

      Something that puts CMHC at risk or would make RBC synonymous with Allied Irish is an actual problem that is worth changing policy over.

  14. Wilson says:

    One time my brother had a big box in the hall covered in a bed sheet and I thought they bought a new mattress. Nope, it was a new TV.

  15. Sarah says:

    Yes, yes, yes, a thousand times yes. This was so well articulated. Thank you.

  16. Chris says:

    I don’t feel it is accurate to characterize OSFI’s changes as “the government tightening the safest lending space there is” or “the government making it more difficult for buyers who have saved a 20% down payment to qualify for a loan”.

    OSFI is an independent regulator. They do not pander for votes, any more than the Bank of Canada panders for votes.

    They are not implementing this stress test to help or hinder Canadian borrowers. Rather, they have implemented it in an effort to ensure stability of Canada’s federally regulated financial institutions. You may say that “the banking system in Canada has never been safer”, but obviously OSFI felt there was room for improvement and acted accordingly.

    Just yesterday, OSFI implemented more rules, regarding capital output floors at Canada’s banks. Theoretically, this will limit the amount of credit banks are able to issue. Do you also perceive this as government making it harder for Canadians to borrow?

    1. JCM says:

      I agree 100%. People talk about B-20 as though it’s an attempt by the federal Liberals to reduce home prices! It’s not (although it will likely have that effect)

    2. DTZ says:

      That’s so cute! You’re like the complete opposite of Edward Snowdon, aren’t you?

      OSFI is independent. Absolutely adorable!

      I’m sure they would never consult with, or take direction from the Minister of Finance, whom they report directly to.

      I’m sure with their jobs on the line every day, they don’t work with the mandate of the elected government party.

      It’s nice to know that some people still blindly trust their government. That put a smile on my face. Thx!

      1. LawrencePark says:

        DTZ: Chris’ comments hardly qualify him as someone who “blindly trusts his government.” Oh, and in the interests of accuracy (perhaps not your strong point?) it’s Edward Snowden (with an “e”).

        1. Chris says:

          It’s definitely interesting to see the extrapolations some people mentally perform. My saying that OSFI is an independent regulator and is not pandering for votes is somehow extrapolated into me having complete and utter blind faith in the entire government?

          Then to further resort to diminutive comments about cuteness etc…well it all makes for a pretty poor contribution to any discussion.

  17. Kyle says:

    @ David

    Excellent blog today. I agree 100%. By the way, i’m liking how you’ve been ending the blog by revealing a bit about what is coming up next.

  18. Max says:

    Absolutely nailed it today. Bravo!

  19. ed says:

    I had my Sony Wega tube tv until I moved last year. The only reason I got rid of it is because my wife said that it is not coming to the new house. It also weighed 145 lbs, so that was part of it too.

    1. David(Not the David who Runs this website) says:

      Ed, I’m exactly the same. I’m still using my almost 30 year old RCA TV, which works just fine. When TV stations started broadcasting in digital format, I cancelled my Rogers service and got a converter box and an amplified antenna. I get over 30 channels over the air and it costs me nothing. I’m not going to buy a new TV until my current one dies of old age.

    2. Condodweller says:

      You can still find these on ebay:

      This tv was the best CRT Sony made which was HD capable it even had an hdmi input and a good ATSC tuner. If you don’t mind 34″ it is probably only beaten by oled today for PQ. But who want’s a 34″ today. If 34″ is enough for you, you have a forklift (it’s about 250lbs) and can find one in good condition it’s a great bargain for those who appreciate good PQ.