OTTAWA - One-fifth of Canadians are struggling to keep a roof over their heads and could have to make drastic cuts to even the basics -- food and other necessities -- as the costs of home ownership increase, according to a report by the Conference Board of Canada.
Mortgage rates are marching higher after a period of historic lows, rock-bottom rates that allowed many into the market who might not otherwise have been able to afford a home, with some taking on dangerously high debt loads.
"The quality and cost of housing are major factors in the health of Canadians," said Conference Board director of education and health Diana MacKay.
"However, about one-fifth of Canadian households do not have the resources to afford both good-quality homes and other health-enhancing expenditures, such as nutritious food or access to recreational activities."
Unaffordable housing, defined as that which consumes over 30 per cent of owners' pre-tax income, causes owners to reduce spending in other areas, which can have negative health effects, the think-tank said Tuesday.
The associated health issues can spill over into the economy at large, it said, reducing productivity, limiting national competitiveness and indirectly driving up the cost of health care and welfare. It added that about 25 per cent of Canadian households already rely on housing subsidies or experience periods of housing "unaffordability," a figure it expects to increase.
Among those likely to suffer as rates rise are new homebuyers who pushed their finances to the limit to get into a house -- they may soon find it difficult to pay for their purchases, said Tom Carter, a University of Winnipeg professor and the Canada research chair in Urban Change and Adaptation.
"There's a lot of people who didn't have to put very much down," Carter said.
"Mortgage rate lending has been fairly flexible in recent years but they still have very high mortgages and when the rates go up, we are going to have more people with a serious affordability problem."
Economists have been warning for weeks that rising mortgage rates were on their way and by Tuesday five of Canada's largest banks had raised some rates by more than half a point.
Carter said there could be more defaults on loans and more home foreclosures in the coming year, but added most people will scrimp on other spending to pay off their mortgages or rents.
"If people really have to cut back in other areas to make their housing payments, it's going to affect consumer spending overall," he said.
Queen's University business professor Louis Gagnon said the rise in interest rates means borrowers should put themselves in risk-management mode.
"Interest rates have nowhere to go but up, which may have a big impact on mortgage payments when people renew," Gagnon said. "The best way to prepare for the future is to pay our debt, not go further into it. In these uncertain times, leverage is out and deleveraging is in."
Adrian Mastracci, a portfolio manager at KCM Wealth Management, said debt-burdened consumers should consider consolidation while they can still lock in to relatively low rates. Borrowers with mortgages at higher rates don't need to wait until their loan matures to renegotiate, as most loans have prepayment privileges.
He said consumers should aggressively pay down lines of credit now so their monthly interest costs don't rise when rates do, while those with high credit card balances should transfer them to a lower cost line of credit or mortgage.
He advised shopping around because lenders will negotiate to attract or keep business, adding it's important to borrow only what is required and to design a plan to repay it in the shortest time.
