Has Manulife Bank uncovered the truth?
Or is the bank merely reminding us of what we already know?
“Debt truth revealed,” is the promotional line for the bank’s national survey of household debt, conducted across homeowners aged 20 to 69 with incomes of $ 50,000 or more. There’s a high degree of self regard in that assertion. The skeptic might archly view CEO Rick Lunny’s accompanying video and think, what’s he selling?
As it happens, an “all-in-one mortgage such as Manulife One” is what he’s selling. “The truth is, traditional banking is a really inefficient way to manage your money,” Lunny says in the video. But with Manulife One “your savings are used to offset your debt.” When the CEO speaks about homeowners “building flexibility” into debt structuring, he’s really saying he wants that business.
Manulife, remember, hasn’t been in the mortgage game all that long. The insurance company entered the field in 1993 when Manulife Financial was given the green light to open a federally regulated bank. Manulife One was launched six years later.
So one reading of the “debt truth” revelations is as a come-on for the advisor bank that aims to help millennials better manage their money.
The underlying facts, however, are mere tweaks to a long-known state of affairs that continues to preoccupy the Bank of Canada, economists, home owners and bank analysts, with an extra layer of worry laid on by the troubles at alternative mortgage lender Home Capital.
The known knowns: house prices in certain markets are insane. Mortgage debt continues to rise. Too many home owners are utterly unprepared for income shocks. Just 51 per cent of mortgage holders have, the Manulife survey reports, “$ 5,000 or less” set aside to deal with a financial emergency, a finding not out of step with the bank’s own reporting last November.
Which demographic group would have the most difficulty meeting a mortgage payment in the event of an emergency? Millennials.
Surprised? Of course not.
Generationally, it’s always the younger cohort that faces the steepest debt mountain. And the percentage living paycheque to paycheque is an old story. For the past three years the Canadian Payroll Association has been reporting that close to 50 per cent of employees would find it difficult to meet their financial obligations if their salary or wages were delayed by a single week.
I raise none of these qualifiers in an attempt to discount the depths of our troubles. Household “vulnerabilities” have been an ongoing preoccupation for the Bank of Canada — remember its system review in December that revealed that almost half of the high-ratio mortgages originated in Toronto in the third quarter of last year had loan-to-income ratios in excess of 450 per cent, a near 10 per cent increase?
I won’t go on about the easy money foundation that helped create this state of affairs. Surely we’ve walked that terrain often enough. Tightened financial rules were designed to rein in the market, which begat another obvious outcome: ballooning growth in the alternative mortgage market including, we now know, mortgage brokers who created false income documentation for borrowers. Any talk of no-doc mortgages is bound to trigger memories of the subprime meltdown in the United States. Canadian regulators assure us that all is contained.
On Wednesday, Bank of Canada Governor Stephen Poloz will announce the bank’s interest rate decision, to be followed in early June by the bank’s latest financial system review. Housing, once again, is bound to be a primary focus.
This is where the true vulnerability lies: young indebted home owners who have yet to experience anything other than interest rates in the low, very low, single digits. In this, Manulife Bank did come up with a statistic that’s worth paying attention to: 70 per cent of mortgage holders surveyed report that they would be unable to manage a 10-per-cent increase in their mortgage payments.
Perhaps they can’t imagine that ever happening.
Perhaps they can’t face the truth.