Canada

BoC: 8% of Canadian Households Owe More Than 20% of The $2.1 Trillion In Debt

BoC - 8% of Households Owe More Than 20% of The $2 Trillion In Canadian Debt

Canadian real estate debt hit a new high, and the news gets worse as they explain it further. The Bank of Canada (BoC) updated household debt numbers for March. In a speech this week, BoC’s Governor Stephen Poloz also gave further insights on the numbers. The record debt levels are concentrated in a smaller segment of Canadians. These Canadians are now in a “highly vulnerable” position, and they’re f**ked if they don’t start preparing for higher rates now.

8% of Canadians Have Mortgage Debt Over 3.5x What They Make

In a speech this week, the BoC gave us further insights on the Canadian debt problem, and it’s worse than we thought. It turns out 8% of households have mortgage debt that’s more than 350% of their gross income. This segment of borrower represents “a bit more than 20 percent of total household debt.” BoC Governor Poloz stressed that these households need to understand how “personally vulnerable” they are, as rates rise.

Rising rates are already putting the pinch on households, and it should get worse. The BoC reiterated the “neutral rate,” which is the rate where policy is no longer expansionary, is between 2.5% and 3.5%. Assuming no “shock” to the economy, rates will get there. Currently we’re at 1.25%, so that would mean rates will double over the next few years. You know, if we don’t face a major recession. Then you’re in the clear on rates, but a whole other bag of issues will crop up. On that note, onto those climbing debt numbers.

Canadian Households Owe More Than $2.1 Trillion Dollars

Total household debt hit a new record, but the annual pace of growth continued to decline. The total balance at the end of March stood at a whopping $2.129 trillion, up $3.4 billion from the month before. The annual rate of growth is now 5.25%. While it’s a new all-time high, it’s also the slowest pace of growth since November 2015. Let’s break this down into the two major components – mortgages, and consumer credit.

Source: Bank of Canada, Statistics Canada, Better Dwelling.

Canadians Owe Over $1.52 trillion Worth of Mortgage Debt

Outstanding residential mortgage credit is also at a new high. The total outstanding balance of residential mortgages hit $1.52 trillion, up $1.88 billion from the month before. That brings the annual rate of growth to 5.27%, the lowest since March 2015. The slowing rate of growth is being attributed to B-20 stress tests, and isn’t the good news people think it is.

Source: Bank of Canada, Statistics Canada, Better Dwelling.

Canadian Owe More Than $603 Billion In Consumer Credit

It’s not just mortgage debt those crazy Canucks are diving into, consumer credit is also at an all-time high. The total balance of outstanding consumer credit stood at $603 billion, up $1.54 billion from the month before. The annual rate of growth is now 5.2%, the lowest its been since July 2017. Consumer debt growth is the closest to beating mortgage growth, since 2010. That’s… a special moment for all of us.

Source: Bank of Canada, Statistics Canada, Better Dwelling.

High levels of household debt are a concern, that gets even worse when you realize how concentrated it is. It’s also created a debt trap for the BoC. Continued economic growth will send rates higher, putting these households at further risk. Lowered growth will send debt levels higher, putting even more households at risk. This is fine. 😬

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64 Comments

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  • OH 8 months ago

    I think they should have rates a long time ago. Restricting policies based on just a few households is dumb.

  • Trader Jim 8 months ago

    Needed to do the math on this for personal satisfaction.

    8% of households would be 1,125,766, which means on average they’re carrying $373,079 – about 3x the rest of the average of households. That’s not great, especially since we know their gross income is less than a quarter of it. These are the households that are going to get their butt kicked in a correction, likely sending them into negative equity.

    • Sammy 8 months ago

      This also excludes private lenders, so add 50% at very high interest rates.

      • Alistair McLaughlin 8 months ago

        No, it includes all “market debts”. StatsCan has pretty accurate debt figures that include all forms of credit.

    • rippinmachines 8 months ago

      Do you really think $373k is a lot of mortgage debt? Sure, the cost to service it is going to rise but it doesn’t sound like a crazy number to me.

      • Trader Jim 8 months ago

        Keep in mind that $375k is the average, excluding private debt not being tracked, and friends and family debt. There’s also likely to be regional differences, which likely make it higher in Toronto and Vancouver.

        The dollar value isn’t high, but contrast that to income, you double the interest rates, and you get a big problem. The US only had an average of $52k per person when they had a debt crisis.

  • Chad 8 months ago

    Garbage stat as usual. My best friend owes pretty much 3.5 times his annual income on his home (which I helped him buy). He also has around 60 % equity in his home and when he bought he put 35% down. He is hardly in jeopardy if interest rates rise. Data in interesting but if we don’t know the full details then it is just used for conversation’s sake.

    • ISS 8 months ago

      Not a big commenter, but this is clearly a real estate agent or mortgage broker that’s pushing their terrible math.

      If your friend’s in Toronto, and gets hit with a 30% correction, he loses 5% of what he put down.

      If your friend is on a variable, the interest rate at his renewal will pop to 480bps when monetary expansion stops. The amount he’ll pay to service a mortgage at that rate, will be 2x the debt they take out. If they’re on a fixed rate, they’re starting at 2x the debt, and they’ll move up. They may not be in trouble, but they sure as fuck won’t make a profit. Especially when you consider the OC on the capital required.

      • Chad 8 months ago

        Oh sorry for not commenting enough eager beaver. I stated ( I helped him buy) so not exactly hiding anything. He bought in September 2014 so first, it would take a lot more than a 30% correction in order to cut into his equity from the down. Second, the point is the headline is clickbait unless it is given context. The 350% figure may be of concern if the person bought last year. But for those that bought a few years ago, it is a much safer hedge. No different than in the U.S when some made a killing shorting mortgage pools. If you shorted the pools from 2006-2007 you made a killing. If you shorted the pools from 2002-2004 not much when compared to the later years. The difference was simple, the earlier mortgages where on homes that had appreciated greatly over the 4-5 years and therefore those owners had options. The ones that got in at the end didn’t have many options when the market turned so….clunk!

        • Grizzly Gus 8 months ago

          Anyone with those ratios is just as exposed to raising rates regardless of what their total debt is vs the income. Its a ratio, just means how much your total debt is vs income.

          3.5 million in debt making 1 million a year has same ratio as 350k in debt making 100k.

          Raising rates by x%, ups your debt servicing by y% as a percent of income. The income you have to buy other things goes down. Too much of your income going to debt payments = a very happy life and marriage………..

          The advantage for those who still have positive equity is that it will be easier for them to escape the debt trap. IE walk away with a bit of money in the bank rather than be forced into bankruptcy. Debt squeeze will still have the same impact on day to day spending.

          • Grizzly Gus 8 months ago

            *raising rates regardless of what their total debt is vs their equity.

        • Alistair McLaughlin 8 months ago

          The context is in the article. Or did you just read the headline. All headlines are clickbait.

    • Bluetheimpala 8 months ago

      You’re right. And I know a guy who can suck his own dick and feels with some basic female interactions he does not need a mate…. Everyone knows a guy who knows a guy who seems to be fine regardless of the realities.. Glad your friend will be ok and represents the broader populous. Hope his neck is ok. BD4L.

      • Chad 8 months ago

        The same anecdotal argument can be used in reverse….everyone knows a guy that will lose…or win. Which is why the headline is clickbait.

    • Alistair McLaughlin 8 months ago

      And if your friend loses his job, he’s effed.

      • Investor 8 months ago

        Doesn’t that apply to almost everyone? Job loss is a special scenario, even when you owe very little.

        • Alistair McLaughlin 8 months ago

          “Job loss is a special scenario.”

          Not it isn’t. It’s a normal scenario that nearly all of us go through at one time or another. Leverage is the special scenario. I find the following equations helpful:

          Job loss = trouble
          Job loss + leverage = big trouble.
          Job loss + leverage + declining asset prices = bankruptcy

  • Grizzly Gus 8 months ago

    Has anyone ever heard of a bankruptcy score before?

    https://globalnews.ca/news/4184225/credit-score-bankruptcy-score/

    This could get ugly for that 47% of mortgages that will have to renew.

    • Alistair McLaughlin 8 months ago

      Those bankruptcy scoring models were designed precisely because the credit score misses certain obvious signals of financial distress. A person can have a great score, but be insolvent; as long as their making payments on time. The bankruptcy score model looks for those other signs. And it means credit that would have been available to some people will no longer be. It’s not a major development, but it’s one more road block for some people to access credit. These road blocks are starting to add up. Mmr’ s denial notwithstanding.

  • @xelan_gta (former Xelan) 8 months ago

    Thanks for this article, very useful data.

    I decided to open my twitter account and I’ll post links to the data I find interesting and my thoughts there so I don’t hijack this blog with non-related topics. Username “Xelan” was already taken so I registered as @xelan_gta

    I will still be following this blog because I think it’s the most useful blog for the general public but I’ll post most of the stuff on twitter.

  • Joe 8 months ago

    This may have been posted already, but anyone see this:

    http://www.macleans.ca/economy/realestateeconomy/toronto-real-estate-losses/

    I know the bubble burst, but it’s accelerating now

    • Grizzly Gus 8 months ago

      I feel like we are going to start hearing more and more about ruined individuals and fraudulent behavior. This is just the tip of the iceberg.

      • @xelan_gta (former Xelan) 8 months ago

        Grizz. no doubt we will. I got a confirmation from TD that B-20 applies to all pre-construction deals as well.
        So we should now start hearing those stories from condo buyers as well with a sharp increase as soon as condo prices stop growing.

        • Grizzly Gus 8 months ago

          And that’s also pre con that was contracted before B20 came out?

          If so then yes this will be even worse for condo market

          • @xelan_gta (former Xelan) 8 months ago

            Correct, if you bought pre-construction before 2018 and closing it after May 1, 2018 you will be subject to B-20 for sure (because pre-approvals expired).

            However since condo are growing 20%+ YoY it’s not a big problem because buyers can find many solutions for that.
            With 20% YoY price growth even taking a private mortgage at 8-12% doesn’t sound like a bad idea. (that’s what many buyers may think).

            So everything should look normal “on surface” until that 20% YoY is gone like it happened in detached segment.

          • Grizzly Gus 8 months ago

            Thanks for looking into and sharing that Xelan. Good info to know

  • @xelan_gta (former Xelan) 8 months ago

    Before placing all blame on reckless borrowers let’s do a quick math:

    Median household income in Toronto: $78,667 (50% of all Toronto families make less than that)
    completely reckless debt level of 350% would be $275k
    Let’s say that family managed to get 20% down somehow, it boosts their purchase price to $330k

    So from BoC standpoint it would be completely irresponsible and extremely risky for an average family to purchase $330k property in Toronto.

    Let’s navigate to Realtor.ca and do a search within this price range in Toronto. The result is about 100 properties available for 50% of Toronto households. Very irresponsible indeed.

    What if family don’t have 20% down? What if it’s not family at all but individual buyers whose median income in Toronto is around $40k?

    This is a very toxic environment for valid first time homebuyers when they are facing a choice either to rent forever, move to a different city or overextend. And they are not at fault for creating this environment but ultimately they will pay for all other people RE gains. Yes, they still should plan all the risks prior to making a purchase but I completely understand them. I was in their shoes a while ago and decided to get out exactly because I see all the risks growing and my debt-to-income ratio was 600+%.

    So when the government created a mess and now asks everyone to be smart – this is not a solution because it’s only possible in a magic world. The only solution would be to crash the market and bring affordability back to fundamentals but no politician will have the balls to do that because it may be the end of his/her career. I hope I’m wrong and government will succeed with their “soft landing” idea but I personally doubt it.

    I’m only protecting valid first time homebuyers here and strongly oppose reckless borrowing for RE investment or speculative purposes. They are a major contributing factor why many families are completely priced out of the markets today but again it’s the government who created such an attractive environment for those investors.

  • Tim2 8 months ago

    Anyone read the REAL life stories of this “hot and back to normal” real estate market on Macleans this am?……sorry its not from “Buzz Buzz” or TREB……=) YOUR poorer than you think.

    • Alistair McLaughlin 8 months ago

      Yup. This is a realtor talking:

      Jaypour has seen this scenario before, and expects it to play out again. “The worst is still to come,” he predicts…. Jaypour is concerned that buyers who took out private mortgages last year simply won’t be able to refinance (especially if their homes are now worth less money) and will have to sell over the next year. Since January, Jaypour has worked with many first-time buyers who haven’t been able to qualify for a mortgage and decide not to purchase anything. “The last two or three months I spent hundreds of hours driving around people in my car who couldn’t get mortgages, and I said, ‘Enough is enough,’ ” Jaypour says. He’s semi-retiring as an agent to focus on his construction and restoration business.

      He’s an experienced realtor, and he’s quitting. “The worst is yet to come.” Not exactly what you’d get from a TREB release is it?

      What he identified in that paragraph was a pent up shadow inventory of houses owned by soon-to-be desperate sellers who were counting on refinancing, but suddenly can’t get any. They can’t afford to keep paying the extortionate alt-lender rates, so they’ll be forced to sell, right when many would-be buyers have just been forced to the sidelines by B20. What’s that going to do to prices? The fact that he doesn’t see a future in his industry is telling. If it happened in detached, it will happen in condos. Only a matter of time.

  • Fred 8 months ago

    This is fascinating, but not at all surprising. So I wonder if the 8% owing more than 3.5X their income may be a little distorted. For example, I own my own home and two rental properties. The amount of debt owing is much greater than my T4 statement. I wonder when they did the survey, do they filter out or at least ask if they own more than one property and what they are used for? Also, if the person surveyed does have a rental property, how much net operating income they are receiving from the property? If they are not filtering those types of borrowers out of the equation, it may not be as high of a percentage.

    • Alistair McLaughlin 8 months ago

      Owning multiple properties that are mortgaged is not a sign of strength, but of weakness. Even if you’re OK, others in your exact position will not be. Mass participation in the “income property” market by modest income earners was one of the major causes of the US crash.

      • MH 8 months ago

        Apparently there is some fundamental law of the universe that says that some people are capable of learning the meaning of leverage only the hard way.

        • Grizzly Gus 7 months ago

          All history teaches us is that we never learn from history

  • Alistair McLaughlin 8 months ago

    The home sold for 25 per cent less than what John had paid just five months earlier, leading to hundreds of thousands of dollars in losses. “I was so greedy,” he says now. “I will not play the game like that again.” Painful as it was, he looks back at the debacle as a learning experience. He even purchased some books about real estate investment on Amazon to learn how to do it properly.

    http://www.macleans.ca/economy/realestateeconomy/toronto-real-estate-losses/

    I nearly pissed myself laughing at that last sentence. The guy lost probably $600K in the span of a few months. He says he learned his lesson. So he buys some books to learn how to do it properly. Dude, you don’t need to get better at this. You need to stop doing it!

    • Grizzly Gus 8 months ago

      This is John,

      John likes to speculate on real estate and is not worried about debt.

      John lost everything.

      Don’t be like John

      • Mmr 8 months ago

        Lmao you are savage making fun of poor guy who lost everything for being greedy 😆😆😆

        • Grizzly Gus 8 months ago

          The 2 trillion dollar question is how many Johns are in the system. This article and BOC implies 8% of Canada total. Expect a much larger consecration in GTA and GVA. The storm is coming

    • Joe 8 months ago

      This part was off:

      “John, a real estate agent”… it’s his business to know

      Every real estate agent that posts comments here, needs to read John’s story.

  • Willy 8 months ago

    I decided not to buy real estate for now at least partly because I believe houses should be first a place to live in but my problem is that I haven’t done the research on other investment vehicles other than housing yet so if anyone has any suggestions they are more than welcome to be listened to.

    • Tim2 8 months ago

      I was looking at a modest ranch style house in Stouffville last year, just as the summer was underway. $840k. Needed alot of work. Refused to dip into savings or borrow to make it more modern and sat back and observed. Pool, backed onto the York Region forest where I rip it up in my Cannondale =)

      Came on the market 2 weeks ago @ $730k, sold conditional within 2 weeks. Will find out next week if it closes. Message, if its priced right, they will sell, and are, the greed dorks trying to make their money back….well, %^&* em. thats what 15% decrease in less than a year….again real life…..

    • Alistair McLaughlin 8 months ago

      Everything is in a bubble right now. Bonds. Stocks. Housing. Best to cool your jets and just stick it in a high interest account (“high” being a relative term of course – you’re lucky to get 1.5%, with a temporary bonus rate of 3% or so for a few months).

      If you’re saving for a down payment, you don’t want to be in a position where housing corrects 30% and you’re ready to buy, but your down payment took a 30% hit in the markets.

      • Grizzly Gus 8 months ago

        Depending on how much you got I also wouldn’t keep more than 100k in a single account. You might need to have accounts with a few different banks. Buying a bit of gold or investing in natural resources can be a hedge against inflation. I expect our dollar to plunge at some point.

        I bought into a few US equities a couple weeks ago including Apple. They just went public with their intention to buy back 100 billion worth of stock. Also just came out that Buffet took a huge stake over the last quarter. Some big US companies are using the trump tax to bring money home. Apple is getting a lot of attention now but there are a few others in the same boat. Bit more to be made here but its a short term play. The entire market could crash at any time. The everything bubble is real

        • @xelan_gta (former Xelan) 8 months ago

          This is a very difficult year for investments and require a lot of knowledge (which I don’t have)
          I tried to invest small portion with Portfolio Manager but it’s not working quite well.
          For most of the funds I haven’t found anything better than just shuffling those between “promo saving accounts” with 3+% return for now.
          Some ideas which look valid for me would be to bet on:
          * increasing volatility
          * Rising interest rates in US

          As soon as I’m ready I’ll definitely bet against Canadian RE but only with money I’m OK to loose.

      • Tim2 8 months ago

        being patient. agreed, everything is frothy at this stage.

  • @xelan_gta (former Xelan) 8 months ago

    Another confirmation that HELOCs are on radar of policymakers:
    https://www.bnnbloomberg.ca/video/home-equity-loans-could-soon-be-targeted-by-policymakers-realosophy-s-pasalis~1386167

    Overall interesting interview.

    • Willy 8 months ago

      I personally think helocs have been playing a major role in creating the bubble and at some point they can become very dangerous if things turn down and they can’t go well forever. They are like a ponzi scheme.

  • @xelan_gta (former Xelan) 8 months ago

    Just watched interview with Rosenberg where he said that Canadian bond yields 90% correlated with US bonds which means Ottawa has almost 0 control of our interest rates and as soon as they go up in US they will go up in Canada.
    We already kind of knew/suspected that but that’s just an extra confirmation to that theory.

    I’m starting to explore the idea that Ottawa already knows that housing market will collapse and all their policies are now directed to minimize the impact for important institutions. I started to suspect that with B-20 because like I explained previously that regulation will only speed up the crash. Recent TD’s extreme rate increase goes well with that theory too.

    I just don’t see how Canada can survive 5% 5-year fixed mortgage rate and looks like that rate is unpreventable in Canada within the next couple of years (unless there will be new major shocks to US). I’m still not 100% convinced about that but if that’s the case Ottawa knows well about it. I’ll keep researching.

  • Pascal Hughes 7 months ago

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