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Did a Hot Housing Market Drive Excess Summer Spending?

Whispers of a housing bubble continue to be heard in Canada. This year, certain housing markets have continued to see value increases, and those whispers have become significantly louder. Despite this, it appears that Canadians continued to borrow and spend this summer at a pace that exceeded their budget. According to a recent Ipsos Reid poll on behalf of BDO Canada Limited, 29 per cent of Canadians have more debt now than they did in May. 33 per cent spent more this summer than last, despite numerous economic warnings which included a possible housing correction.

Looking at these numbers, it’s clear that consumer confidence remains high in Canada and there is less emphasis to pay off debt. Along with home renovations, vacations, day trips, dining and entertainment were prominent ways for people to spend their money during the summer. Is it over-confidence, though? Statistics show there may be a disconnect between how Canadians perceive the current housing market and what the reality is. The perception is that prices and value will continue to rise; in August, 34 per cent of respondents in the Bloomberg Nanos Consumer Confidence Index believed home prices in their neighbourhood would increase in the next six months. That number of confident respondents is up from 32 per cent in July, the largest increase in a year.

The reality, though, is that certain markets in Canada are facing a greater risk of a correction, or a sudden drop in housing value. No market is at higher risk than Ontario’s most populous city, Toronto. Here, Canada Mortgage and Housing Corporation (CMHC) recently upgraded the city’s risk level for a correction to “high” from “moderate”, finding evidence that the market was overheating and outstripping income growth. It’s not hard to believe, when you look at how housing prices in Toronto have jumped ten per cent since just last year.

What does this mean for the average Canadian? Well, whether you live in Toronto or not, any significant housing market correction would impact the national economy and interest rates would likely go up. Those 29 per cent of Canadians who took on more debt this summer would face greater risk, though younger adults would be one group that would be hit hard. Millennials often don’t have the savings to fall back on, so any rise in monthly payments on credit cards and student loans would be impactful. Baby boomers would see impact too, especially those who took advantage of home equity loans to make big purchases.

It’s important, then, to temper confidence when considering whether to take on more debt. Markets fluctuate, and though Canada’s market has been good for five years, the risk of change is becoming greater.

To prepare for a possible correction, it’s also important to understand the types of debt to avoid and how to grow your hard-earned dollar. To do this, lessons in basic financial literacy can be a great weapon for Canadians to have in their arsenal. Fortunately, the Financial Consumer Agency of Canada (FCAC) has initiated a National Strategy for Financial Literacy to respond to this need; this initiative aims to provide budgeting skills and better knowledge about money and debt management from coast to coast. If you’re wondering about your level of financial literacy, we urge you to take the FCAC’s financial self-assessment quiz. It’s also a good idea to be aware of what effect a rise in interest rates would have on your overall financial health by “stress testing” your debt. A Financial Health Test will help the average Canadian see if their debt situation is perhaps too precarious and it’s time to concentrate on efforts to pay off debt.

Did summer spending put you too far into debt? Worried about what a housing correction would mean for you? Join the conversation on social media using the hashtags #BDOdebtrelief and #CountMeInCA.

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