A new study shows a correlation between high housing costs and low financial wellness
The mortgage and housing market surge of the COVID-19 era in Canada shows little sign of slowing down, with another hectic year seemingly in the offing for the country’s mortgage professionals.
Strong activity continues even as recent reports have shone a light on the precarious financial situation facing many households, including a projection by Angus Reid Institute that many Canadians will face an increasingly difficult outlook in 2022 as interest rates rise and inflation continues.
That report said that four in five households are unable to keep pace with the rising costs of living, with skyrocketing house prices across the country accompanied by the increasing cost of staple goods such as groceries and gasoline.
Now, a new study by the Financial Wellness Lab of Canada has highlighted the massive impact that the cost of housing can have on financial wellbeing, revealing that Canadians who spend a large proportion of their monthly income on housing are far likelier to struggle financially than those who don’t.
The report divides Canadian households into three categories of financial wellbeing – comfortable, coping and stressed – using machine learning clustering to gain insights into data and any patterns that emerge.
It showed that in the comfortable group, a clear majority (58%) spend less than 30% of their monthly income on housing costs, compared with around two-thirds (66%) in the “stressed” category who allocate more than 40% of income to housing.
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That’s significant because it indicates that a large number of financially stressed Canadians are spending more than the monthly amount recommended by the Canada Mortgage and Housing Corporation (CMHC) – 39% of income – on mortgage and housing costs.
Interestingly, the report also showed that Canadians within the “comfortable” category are by no means stress-free when it comes to housing and mortgage costs, with nearly a quarter (23%) spending more of their monthly income on housing than CMHC recommends and 29% concerned about their levels of debt.
Chuck Grace (pictured top), program director, Financial Wellness Lab of Canada, told Canadian Mortgage Professional that the findings on housing expenses were some of the most noteworthy about the report, illustrating some of the consequences of the recent mortgage boom.
“One of the things that really jumped out at us this year was housing costs: that stressed group is carrying a lot of mortgage debt in particular, [and] if you throw taxes and other financial obligations on top of that, it doesn’t leave those Canadians with a lot of wiggle room if something else happens, like if interest rates go up,” he said.
“It wasn’t just that stressed group – 41% of the ‘coping’ group were above that threshold as well, and 23% of the ‘comfortable’ group. So that tells us that in general there’s a lot of mortgage debt being accumulated out there.”
The good news? The report showed that movement between those three clusters is possible, with 16% of Canadians deemed to be financially stressed in 2020 having advanced into the “comfortable” category within a year.
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Grace said that the three factors that distinguished the groups were their saving patterns, spending patterns and debt patterns, with movement normally taking place because of a positive change in some or all of those areas.
“[Those who moved into a more comfortable category] are either able to save more or spend less, or they took less spending and put the difference between paying down their debt,” he said.
Indeed, Statistics Canada reported last year that all households recorded improved net saving in 2020 compared to the previous year, with middle-income households experiencing significant gains – achieving a net saving position in 2020 after posting a net dissaving position in 2019.
That was due in large part to reduced spending following travel restrictions and lockdowns as a result of the pandemic, with the statistics agency noting that net savings declined for many households in the final quarter of 2020 as the country began to open back up.
Unsurprisingly, the survey also revealed strong linkages between financial wellness, physical health and mental wellness, with those in the higher categories more likely to have a positive outlook in those areas.
“It’s really difficult to pull those three apart and look at them separately because they’re so tightly intertwined,” Grace said. “Financial stress in the household creates mental stress for some households, and we know that mental stress can lead to physical stress or distress if we don’t take care of that. They’re very tightly bound.”
