Are debt levels too high?

Bank of Canada Governor Mark Carney says debt levels carried by Canadian families represent a potential threat to the national economy.

Bank of Canada Governor Mark Carney says debt levels carried by Canadian families represent a potential threat to the national economy.

Globe and Mail columnist Robb Carrick says buying a home might be the biggest financial mistake young families make — if they intend to save for retirement.

Gloom and doom — and like the prophets of old, these people are totally ignored.

Canada Mortgage and Housing Corp. reported that the housing weather was unusually hot in March, with 14,517 housing starts across the country. That translates into 215,600 new homes this year, if we hold the pace.

In Red Deer, new home starts were also strong, with 25 new homes begun — a 47 per cent jump over the same period last year. As a rule, when we’re talking about small numbers like 25 new homes, reciting the percentage difference is silly. But it is mentioned here to help you guard against other prophets of either doom or salvation who use 47 per cent as an indication of anything. Tell them when the Red Deer population reaches a million, 47 per cent will mean something. Until then, it’s 25 new homes.

So why does no one other than Carney and a handful of business columnists foresee doom? Besides, how much does one need to earn before the middle-class dreams of home ownership and comfortable retirement can begin?

There are all kinds of mortgage calculators in the digital cloud. Our cloud today floats above Ontario and it tells you that the income you’ll need to pay a mortgage, calculating for interest rates, heating costs and other obligations.

The average mortgage in Red Deer is $206,000. The average family income in Red Deer is $99,000. The average age of a mortgage-holder in Red Deer is 35. Median family income in Red Deer is $80,000. (Round numbers here, just to analyze a point, not draw a family budget.)

Let’s start plugging figures into the cloud. The calculator says if you have no other major obligations, and can keep average heating costs to $125 a month, you will qualify for a $206,000 mortgage (all examples at a steady three per cent interest rate over 25 years) with . . . $47,000 in family income. Go ahead and try for a loan; the cloud calculator says you’re good.

If only life were so simple.

Let’s suggest you also have $1,000 a month in other obligations: car loan, student loan, credit card balance carried forward, etc. To cover these, plus your mortgage — and nothing else for 25 years — you need a household income of $85,000. Sort of tells you the weight of that card in your pocket and the car in the driveway.

If you’re the average 35 year old today, you’ll be debt free at 60 (assuming you never have kids and never take a big vacation). Only seven years left to put up half a million for retirement before you can cash in on that $500 a month of Old Age Security.

If you start saving for retirement at 35, it’s much easier — even more so if you start before age 30. But then, you bought a house, didn’t you? You had kids. You went on vacation. You bought a new car.

Suppose you and your spouse started early, putting $150 a month each into an RSP. Good move. But now, to own your house, plus $1,000 a month in other debt payments, you need a steady family income of $96,000, says our calculator in the cloud.

Average family income: $99,000, you’re under the wire. Median family income of $80,000, you’re in trouble. For an average mortgage in Red Deer.

How many prophets of doom does it take to unscrew the lightbulbs in your house?

Only one, if he decides to raise interest rates.

Greg Neiman is an Advocate editor.

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