Canadian’s withdrawing home equity can’t stop, won’t stop. Office of the Superintendent of Financial Institutions (OSFI) filings show the balance of loans secured by residential real estate hit a new record high in September. Despite fast rising interest rates, borrowing for HELOCs haven’t slowed down one bit.
Loans Secured By Real Estate
Loans secured by real estate come in two flavors – personal and business. Personal loans are home equity lines of credit (HELOC) types of loans, and are for consumption. Business are when residential real estate is used to secure a business loan. Both function the same way, but their growth tells us very different things.
Growth of personal loans is typically non-productive, and business is productive. The growth of personal loans are, in the words of one of Canada’s largest banks, to “fund life’s conveniences, such as a new car or home makeover.” They’re also used for “unexpected costs and conveniences.” Growth in this segment is good if you’re a lender, but not so great for personal households at the end of the credit cycle. They increase liabilities, with serving costs that rise as interest rates do. Rising interest rates also tend to cause corrections in home prices. That means these borrowers are very vulnerable in rate climates like the one we’re facing. We want to see low growth here.
Business loans secured by residential real estate can be a positive indicator. A business with no credit history usually has to pledge collateral, and a home equity is a common pledge. Seeing this segment grow is a sign of productive borrowing, so growth here is a good thing. It means the borrower is confident in the environment for business expansion. As opposed to personal loans, where the borrower is confident they’ll take a vacation.
Canadians Borrowed Over $292 Billion Against Home Equity
The total balance of loans secured by residential real estate reached a new record high. The outstanding balance hit $292.3 billion in September, up 0.45% from the month before. That works out to an increase of 4.53% when compared to the same month last year. If adding over $1.3 billion wasn’t interesting enough, the trend may be accelerating. The annual pace of growth has been getting larger since June. Let’s breakdown this debt.
Total Loans Secured With Residential Real Estate
The total of personal and business loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Canadians Owe Over $263 Billion For Personal Loans
The balance of personal loans secured by real estate, a.k.a. a traditional HELOC, reached a new all-time high. The outstanding balance reached $263.3 billion in September, up 0.48% from the month before. The annual pace of growth is now at 6.19%, the highest amount we’ve seen since May. The pace of growth is actually the exact same as last year, tying it for the biggest September ever… even though interest rates have climbed considerably.
Personal Loans Secured With Residential Real Estate
The total of personal loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Businesses Borrowed Over $28.9 Billion Secured With Real Estate
Business loans secured against real estate moved higher, but is down from last year. The outstanding balance reached $28.9 billion in September, up 0.24% from the month before. The balance is down 8.49% from the same month last year, continuing negative growth since April. Of course, the area we want to see growth in is contracting.
Business Loans Secured With Residential Real Estate
The total of business loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
The good kind of loan secured by real estate is falling, while the bad stuff is rising. The balance of business loans in this segment have been dropping since April. Meanwhile, we’re seeing personal loans growth accelerate for a third consecutive month. Despite rising interest rates, personal loan secured by real estate are growing similar to last year.
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“these borrowers are very vulnerable”
There’s a lot of research on the impact of HELOCs during the US housing boom/bust that shows people borrowed and lost the equivalent of most of the gains, and were left poorer than they previously had been before rapid price increases.
this is a disaster waiting to happen. not sure why the government is not doing more to stem this. These are callable at any time by the bank
Callable, but doubtful a bank will. You have to at least have 35% equity. Banks want the interest payments, not the house. If you fall below that, they’ll likely look the other way if you’re making payments.
Hi Trevor,
I’ve understood equity of 20%, not 35%, as the minimum. Is it possibly different from city to city?
Joe
heloc limit can only be 65% of your value. yes, you can re-mortgage to 80% (if you qualify). I deal with a real estate office here in the Fraser Valley, the realtors all behaving like snakes locked in a glass box. tick tock indeed
@Rustinpeace
You doubt banks will ever call those overblown HELOCs? Oh boy, watch and learn and repeat after me … banks WON’T look the other way.
It’s a HELOC not a stop watch, don’t never stop – uncle tony
Seems like we can’t be saved. Fucking animals. Tick tock. BD4L.
Property prices just keep going up, I might as well borrow half of all of my gains forever! /s
We are in the denial phase of the cycle. Capitulation is the next phase. Tick Tock Tick Tock
It could be that HELOC balances are increasing because of higher rates, rather than in spite of them. If homeowners are struggling to cover increasing mortgage payments, an easy (but eventually costly) solution is to tap the HELOC to pay the mortgage bill.
‘Business loans secured by residential real estate can be a positive indicator…it means the borrower is confident in the environment for business expansion…’
I think that’s some wishful typing there.
The traditional ‘job’ has all but disappeared and replaced by freelancers and contract workers who are those ‘businesses’ acquiring credit. Financing KD and Mercedes payments because the VISA is cranked.
No wonder the jobless rate is so low. I’d like to see a ratio of new corporations ($200 set up fee) and proprietorship (almost free?) to the number of people falling off the employment charts. It won’t be linear but it is related. It also might explain why the CRA has such a hard time communicating with people who may not have even realized they should have collected and remitted HST. #hellinahandbasket #weveallgoneto
Happy ‘Merican Thanksgiving! At least the markets are closed.
Too many people funding a lifestyle they can’t afford because they think they need to live that life.
Citizens transformed into Good. Little. Consumers.
Next Global Financial Crisis will be worse than 2009, plus it will potentially leak into Politics.
Go to Ground
RE market is insane, those who believe in strong fundamentals should explain that HELOC & Private Lending share growth first. Those are you genuine fundamentals which are barely holding RE market afloat in GTA.
I’m pretty sure those recent changes will reduce that HELOC growth significantly.
https://www.ratespy.com/got-a-heloc-your-mortgage-options-are-about-to-shrink-11067208
Good luck paying $800k for typical pre-construction condo in GTA.
What about the “loans secured with R/E to make mortgage and car payments” now that Canada’s economy is tanking? I bet that’s what’s really going on with personal loans.
“Business loans secured by residential real estate can be a positive indicator…It means the borrower is confident in the environment for business expansion.” – I think that is wishful typing. ‘Jobs’ have been replaced by ‘contracts’ and ‘freelance’. Credit via a business loan is different means to the same end. The debt ends up financing ‘operating expenses’ like cars and food.
I wonder what percentage of this debt will be (or is planning to be) paid off by inheritances? The boomers are aging and have amassed considerable wealth. Where will it go?
The Elders in my family all have huge debts to finance a retirement lifestyle they did not plan for. When all is said and done, nothing but crumbs will be left over. Assets will also need to be liquidated at a discount when the time comes.
I hear the same story from colleagues at work, neighbours. The inheritances are all spent.
What is really scary, is when there is no money left to cover assisted living facility costs. What becomes of these people? Folks live long these days. Are you taking them in? Will they fit in your tiny condo? Yikes, that will be the real horror show.
Better be careful, 60 to 100 thousand a year for seniors home, would burn a lot up.
Is there any data on the average ratio of the amount of money borrowed from the HELOC to the current market value of the underlying real estate asset? If it is low, say 10%, that doesn’t sound too bad. If however people are pushing it really high, like up to the HELOC limits, that would tell a very different story. Also is there any data to indicate how much is actually invested in businesses and how much is invested back into real estate, e.g. for secondary income producing properties? The latter could amplify the effect of a more serious crash than the recent corrections in Vancouver and Toronto.