Canada

Bank of Canada: Canadian Homeowners Have Extracted Hundreds of Billions In Equity

The Christopher Columbus of central banks has discovered what everyone knows – Canadians are burning equity. A LOT of it. Bank of Canada (BoC) staff have concluded homeowners are extracting a lot of home equity. Consumption and the economy are boosted by the home equity extracted. However, the more significant the sum extracted, the more vulnerable the economy becomes to a housing correction.

The Collateral Effect

The withdrawal of home equity tells us a lot, but today we’re focusing on the collateral effect. This is when people extract home equity to spend, as home prices rise. What’s the point of being a multi-millionaire bungalow owner, if you can’t have a few toys – right? This spending helps to propel the economy. It’s a twofer – home prices rise and the economy gets a boost. Score!

BoC researchers warn, this is a problem if the collateral effect contributes meaningfully. If home prices fall, the equity-based spending disappears. Combine that with slower sales, which leads to lower spin-off economic activity. A decline in home prices is no longer just a hit to paper-based wealth. It has a significant impact on the general economy, and employment. Oxford Economists have been discussing the collateral effect’s role in the US and UK, since the Great Recession.

Canadians Extracted Almost Half A Trillion In Home Equity

Canadian homeowners extracted a lot of equity, between refinancing and home equity lines of credit (HELOC). In 2018, BoC estimates $46 billion in HELOC credit was drawn, that’s down $2.7 billion from the peak hit the year before. Another $37.1 billion was extracted through refinancing, down $3.2 billion from the year before. That’s about $83.1 billion in home equity extracted.

Canadian Home Equity Extracted

The dollar amount of home equity extracted through home equity lines of credit (HELOC) and refinacing.

Source: Bank of Canada, TransUnion, Better Dwelling.

Over the past few years, the amount of equity extracted is absolutely mind blowing. Last year’s $83.1 billion is 6.62% lower than the year before. The number hasn’t fallen below $80 billion per year since jumping in 2015. Over the past six years, Canadians have extracted the equivalent of $477.5 billion in home equity. To put that number in context, the aggregate amount is enough to buy Tencent – China’s second largest company… and there would still be enough to buy a company the size of Imperial Oil.

More HELOCs, But Much Larger Refinances

The HELOC is the weapon of choice for Canadian homeowners, when it comes to equity extraction. The BoC estimates 1,894,100 HELOCs were used in 2018, down 4.43% from the year before. To contract, 296,000 homeowners withdrew equity from a refinance, down 10.27% from the year before. There’s a lot more HELOCs kicking around, when compared to refinancing withdrawals.

Canadians Extracting Home Equity

The number of homeowners using a home equity line of credit (HELOC) or refinancing for equity extration.

Source: Bank of Canada, TransUnion, Better Dwelling.

However, the amount of equity extracted through refinancing is way larger than that of HELOCs. The median amount extracted through refinancing was $62,800 in 2018, up 2.44% from the year before. To contrast, the median HELOC stood at $12,000 in 2018, flat from the year before. Refinance extractions are nearly 5 times the size of HELOCs.

Median Amount of Home Equity Extracted

The median dollar amount of home equity extracted, through HELOCs and refinacing.

Source: Bank of Canada, TransUnion, Better Dwelling.

Seriously, It’s A Lot of Home Equity Extracted

The equity extraction problem is much larger than is currently discussed. National property values increased $333 billion in 2015, the most recent StatCan estimate. That same year, a whopping $82.9 billion in home equity was extracted. The equivalent of one-quarter of the increase in property values was extracted.

The interesting thing is how home value estimates are created, in contrast to debt values. Home values are based on a projection, inferred by what marginal buyers have been paying. If you understand how marginal buyers impact prices, you understand how quickly values move in either direction. Debt on the other hand, is based on an actual amount owing, not inferred. This setup is similar to the one found in the US, pre-Great Recession. Post Great Recession, not all markets give up all gains made during the price run. However, many homeowners didn’t see their net-worth improve, due to the equity extraction.

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22 Comments

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  • Marc 4 weeks ago

    Now how much of this went into lending for MICs and the Bank of Mom and Dad?

    • WW 4 weeks ago

      Why is it a problem if parents want to help their kids buy a home? If they have it, they should spend it to help their family.

      • Trader Jim 4 weeks ago

        That’s not the problem. Spend your money how you want.

        The issue is the amount of exposure in a single asset class. The Government can’t allow the market to crash, but the allocation can’t be corrected without one, or a *very* long time of stagnation while other industries catch up.

        Since it’s unrealistic for the government to let it “crash” and get it over quickly, they’re going to make a series of moves that will handicap healthy monetary policy. Hence, we get a weaker loonie, and young people become debt serfs. Which doesn’t seem like a big issue, until you realize people in debt don’t take chances, which slows business growth.

      • Mtl_matt 4 weeks ago

        Because it increases leverage overall (and the wealth effect). So that 300k house is now worth 800k, I’m pulling 200k out of equity so my son can buy a 650k starter home. Now there’s 650k in mortgage total for 1.45M$ in real estate.

        But whatever, prices never go down! That 800k home should be worth 1.5M in 5-6 years, so let’s buy a condo in Puerto Vallarta, a model S, and 3-4 expensive trips per year. It’s free money!

        No problem right? Except a 40% correction brings the leverage to 650k/870k. Couple it with a big recession and the son losing his jobs, and suddenly both the parents and the son are unable to make their payments. That can’t be right, let’s lower interest rates and increase amortization! The parents can surely work until they’re 95 to pay back the mortgage! They don’t even need to pay it actually, real estate always go up! 10M$ bungalows in 2035!

        This party won’t end well.

      • Millennial Whinger 4 weeks ago

        Because they don’t have it if they have to take it from their equity. Equity gained isn’t free money, and isn’t guaranteed money until the property is sold.

        The problem with the majority of homeowners in this country lately is they don’t understand this simple concept. A loan is a loan, debt is debt, and it must all be repaid with interest.

      • Smaug 4 weeks ago

        If they have it, they wouldn’t be borrowing it.

      • Jason 4 weeks ago

        This article is very misleading.
        Where does the equity extraction go? To the personal consumption or back to the housing market? Actually it’s a better choice if the homeowner sell their home and put the cash back into the housing market as down payment of more homes. Indeed people do this instead of merely consuming.

        • Mortgage Guy 4 weeks ago

          Just because you don’t understand something, doesn’t make it misleading.

          An equity extraction is not a downpayment on another house. It’s removing equity you’ve paid. Only 22% of equity extracted is reinvested. The other 78% is used for things like debt consolidation, but most of it is consumption. Its estimated 0.5% of GDP is recycled equity.

          If you don’t understand how leverage works, I can assure you’ve made a lot less than you think you did on your house.

        • Realturd 4 weeks ago

          The real estate industry is basically bots, trapped in human bodies. Pre-canned responses to things they don’t like:

          – Misleading
          – Preposterous
          – Density
          – Immigration
          – Always a good time

          Note they’ll never give a real response, because they don’t have one. There can be nothing misleading about restating facts. Unless you think being lead away from your narrative is “misleading.”

    • Millennial Whinger 4 weeks ago

      A majority of it, as per many data points.

      The rest of it went into expensive cars, vacations, and home renos.

      All unproductive. But who cares. You’re richer than you think!

    • Average Man 4 weeks ago

      MICs? Sorry, still not up on all the terms,

      • Howard Ma 4 weeks ago

        Mortgage Investment corporations.

        https://www.investmentexecutive.com/in-depth_/special-reports/mics-and-syndicated-mortgages-offer-diversification/

        Personally, syndicated mortgages are the risks I’d worry about, since they aren’t as diversified. Both are fine, but people should know what they’re getting into, and they aren’t as risk free as some people think.

        https://www.cbc.ca/news/canada/toronto/syndicated-mortgages-law-society-1.5283348

        Big concern is people that have been borrowing or refinancing at 2-4%, and trying to collect 8-12%. Leverage is great, until it isn’t.

        • eg 4 weeks ago

          I believe that this behavior is tied at least in part to the failure of the Federal government to run deficits and debts large enough to offset the propensity to save among households and businesses in order to maintain aggregate demand and full employment. Instead they have relied upon the Central Bank for this purpose via monetary policy, which was never going to work as demonstrated by the incredible shrinking of interest rates around the world.
          Give it up already — fiscal policy has to retake its rightful place center stage, returning monetary policy to the sideshow it always ought to have been.
          Don’t be surprised to see a return to capital controls and credit guidance next …

  • Trader Jim 4 weeks ago

    Combine that with your numbers on downpayment sized withdrawals, and there’s a good idea of how much leverage is in the system. Leverage is great on the way up, but a total B on the way down.

    • Ethan Wu 4 weeks ago

      Did I miss an article? Where is this?

      • Trader Jim 4 weeks ago

        Good read. I just sent it to clients the other day. From 2017, but definitely foreshadowed the pre-sale bonanza.

        https://betterdwelling.com/so-are-we-talking-about-these-canadian-cities-where-multiple-mortgages-are-rising/

        • John Jay 4 weeks ago

          So do you expect another buying frenzy with the upcoming federal giveaways?

          I’m trying to figure out whether to get a place or not. If I wait, the housing measures can boost housing 10% or more. IF they don’t implement them there’s no real downside risk unless we get a big recession.

          Such a tough position to be in.

          • Millennial Whinger 4 weeks ago

            There’s risk all-around.

            The housing measured are only for first time buyers, and only the ones dumb enough to take it.

            Rates will have to go up eventually, especially as more risk is identified in the system – which is happening.

          • Joseph 4 weeks ago

            Depends where you live. You can still find okay prices in some spots (Ex. Gatineau). Then again, expect to lose about $6k on a $90k salary by moving to Quebec.

            Southern Ontario got hammered. Torontonians moved to Oakville, Burlington, and Hamilton. In turn, those citizens got pushed to Niagara Falls way and everything in-between (ex. Grimsby, St Kitts). Some may have moved Guelph/Brantford/Waterloo/London way.

            BUT, you may be able to find comparatively decent prices in Welland.

  • Snarky 4 weeks ago

    https://youtu.be/RrFSO62p0jk I feel the comments on this video align with what’s current in Canada. Borrowing through HELOCS on overvalued properties.

  • QEking 4 weeks ago

    The central banks have a solution for this to continue unabated. Negative interest rates and QE infinity.

  • straw walker 4 weeks ago

    Why is the Vancouver housing market still falling?
    One simple answer.. nothings left.. the equity is all gone..
    Household incomes cannot support these lifestyles and house payments.
    The piper needs to be paid.. the gravy train is over.

Comments are closed.