Hold On – fasten your seat belts

Tom Locke - Insolvency Trustee in London, Ontario
August 5, 2022

Hold on, things are going to get a lot worse before they get better.   Interest rates are continuing to rise – after being kept too low for too long (thereby creating a debt trap) – and while there are plenty of jobs around there are less full time jobs than part time.  Interest rates have never been so low for such a sustained period of time, in fact a whole generation has never experienced rates outside of quantitative easing measures.

When rates rise house prices drop, and according to the latest report from Re/Max this has been a pretty wild year so far.  The year started with growth in the first quarter but reversed in the second quarter.  This year’s high (average sales price) in the London market was $823,954 and the low was last month at $673,606.

In simple terms if you bought a house in the months of February or March (2022) you have already lost $150,000 in value.  However, that value is amplified by the mortgage, especially for first time home buyers entering the market with little or no equity.  If you have a $800,000 mortgage on a property worth $650,000 not only is there a $150,000 shortfall in value, but there is also a $150,000 mortgage on nothing.

Other forms of credit remain pretty much the same, credit card usage remains strong, lines of credit and overdraft accounts are pretty stable, there is no asset value to offset against the debt.  Although, as we previously blogged about some of the pitfalls, it seemed apparent that a correction would be coming, people were afraid of being shut out of the market and in essence drove prices up with bidding wars.

Quebec, to its credit has been proactive in helping set some parameters to slow down the use of credit cards by making them harder to cashflow.  The Canadian Bankers Association used to publish credit card statistics but stopped reporting the shameless behaviour of pushing credit cards after wrapping up 2018’s stats.  Hardly something for bankers to brag about!  Currently there are approximately three (3) bank issued credit cards in circulation for every man, woman, and child in Canada.

For the majority of Canadians retail purchases of all kinds are made using credit cards, debit cards and online transfers.  Very few people rely on cash as a primary means of transacting a purchase.  Cash is steadily being phased out.  Other forms of digital currency continue to emerge including Bitcoin and more, but these payment methods are under threat from central banks that have their eyes set on the Chinese model of tying social credits to digital currency.