According to Freddie Mac, the United States started off 2000 owing $5.5 trillion in residential mortgages and finished the decade with $11.8 trillion, a growth of 111% in ten years.
Canada on the other hand started 2000 off with $421 billion and ended the decade with $975 billion, an earth shattering growth of 132% in ten years.
Both countries have experienced similar economic growth and inflation rates over this period.
Total outstanding mortgages have historically been larger in the United States than in Canada due to higher incomes, a lower tax rate, increased purchasing power (PPP) and of course, the tax deductible nature of US mortgages.
According to the Conference Board of Canada, in 2008 Americans earned $6,400 or 20.2% more per person per year than Canadians. The income gap has doubled since 1984 as American incomes have risen much faster and Canada's productivity has fallen (we are now 25% less productive per worker than Americans). As a result, Canadians don't have anything close to the same carrying capacity for mortgages as our southern friends. So what is now unfolding may simply shock you:
United States Residential Mortgage Debt Per Capita
According to Freddie there is $11.8 trillion in mortgages outstanding in the United States. Based on that amount, a recent Reuters article from August 2009 estimated that the average American now owns approximately 8% of their home. In other words, 92% of the value of their homes is owed in their mortgages leaving a total equity of 1 trillion.
However the Milken institute estimates there is $10.6 trillion in outstanding residential mortgages in the United States. This figure is more commonly accepted than Freddie Mac's.
Both figures need to be marked-to-market to represent the true amount owed. It is estimated that of the $2.9 trillion in Alt-A's and ARM's, 41% or 1.2 trillion will default in the next two years. Furthermore, making up the remainder, prime and home equity lines of credit (HELOC's) have a delinquency rate of about 14% which should lead to a default rate of around 5%.
Using the above estimations and marking-to-market, the United States now has between $8.9-9.9 trillion in outstanding residential mortgages. For our argument below, we will average the range to come up with $9.4 trillion.
304 million Americans live in 110 million households (2006) in the United States and approximately 70% are homeowners. As such, that's an average debt of $122,078 per homeowner, $85,454 per household, or $30,921 per person.
Comparing to Canada
In Canada there is approximately $975 billion in mortgages outstanding. Current expectations believe that only 0.4% of these mortgages will default. That provides Canada with $971 billion of mortgages marked-to-market.
There is approximately 33,300,000 Canadians and according to the 2006 Census, they lived in 12,437,470 households. Like the United States, approximately 70% own their homes. That provides an estimated debt of $111,534 per home owner, $78,073 household, and $29,279 per person.
Some might immediately notice that the homeowners in the United States owe almost $10,500 more than Canada, where as per person the discrepancy is much smaller. I would attribute most of this gap to the way the US and Canada measures the number of households. The number of individuals per household in Canada and the United States is the same at 2.5 people. Therefore the per person figure is the most relevant (Americans owe $1,642 more person).
Closing the Gap
To surpass the US in per capita residential mortgage debt, Canada will need to rack up an additional $55 billion in debt. That should occur during the late second to early third quarter of 2010 as we surpass $1.0267 trillion.
As Canada's housing continues to go strong with record high prices and sales, our debt will continue to climb even in the face of a housing correction.
The Big Question
So the media was right afterall. Canada is different. We'll be much more in debt over housing than the US ever was. Yet due to the income gap, tax structure and PPP, Canada's real carrying capacity is at least 30% less.
So the big question on everyone's mind should be this:
"What happens when interest rates rise?"
US Residential Mortgage Report
Jonathan Tonge
www.americacanada.blogspot.com
Comments are open to the public. Please share your opinions, links and ideas with other readers.
