Canadian real estate owners received a windfall of equity over the past decade. Rather than selling for a profit, many are turning to home equity lines of credit (HELOC) to reap the rewards. The popular form of debt allows owners to borrow equity in their home, and pay it back like a second mortgage. They’re easy peasy, and may have been a major contributor to the collapse of the US real estate market in 2007. Let’s see how out of control Canadians have become, by looking at the size and scale of this problem.
The HELOC Problem
There’s nothing wrong with a home line of credit (HELOC), but there’s a lot that could go wrong. The Financial Consumer Agency of Canada (FCAC), a government agency in charge of consumer protection, noted having a HELOC “significantly increases” the chances of a mortgage holder defaulting. Besides increasing the loan-to-value (LTV) on real estate, it also uses equity that could be tapped during financial hardship. Over 40% of mortgage defaults that occurred in the US between 2006 and 2008 were homes with a HELOC.
HELOCs in Canada are also a little more complicated, since they’re often used to get more leverage. In the US, there were anecdotes about HELOCs used to finance lifestyle inflation. What’s the point of having a big fancy house you can’t afford, if there isn’t a nice car in the driveway – right?
In Canada, HELOCs are often used to finance down payments on additional homes. There’s no shortage of advisors suggesting a HELOC to buy a second home. Parents also tend to borrow HELOCs, and “gift” the loan to children for use as a downpayment. Now 35% of first-time buyers in Toronto, and 40% in Vancouver, receive down payment help from their parents – quite a bit is likely HELOC cash. That means Canadians are using leverage, to get more leverage – and lenders may not be fully aware.
Canadian HELOC Growth Peaked In 2017
Canadian HELOC growth is slowing, but after seeing explosive growth last year. The balance of HELOCs reached $286.81 billion in Q2 2018, up 1.83% from the previous year. That’s down from last year, when growth peaked at a whopping 12% in Q2 2017. For context, peak real estate price growth occurred in the same quarter last year.
Canadian HELOC Growth Vs. GDP
The growth rate of outstanding balances on home equity lines of credit (HELOC) and gross domestic product (GDP) in Canada.
Source: Better Dwelling.
Canada’s HELOC Debt Is Over 13% The Size of GDP
For some perspective, let’s contrast HELOC debt to gross domestic product (GDP). HELOC debt relative to GDP reached 12.89% at the end of Q2 2018, which is a slight improvement from the recent peak. The recent peak in Q2 2017 (a busy time for home equity withdraws) saw HELOC debt relative to GDP reach 13.17%. We know, those percentages mean nothing without context.
Even during the peak real estate bubble in the United States, HELOC use was lower. The HELOC to GDP ratio in the US reached a massive peak of… 4.5% in 2007. Post-correction, the ratio has fallen to just over 3% at the end of Q2 2018. When contrasted, Canadians are using an amazing amount of home equity, for such a small population.
Canadian HELOC Debt To GDP Ratio
The size home equity lines of credit (HELOC) debt relative to gross domestic product (GDP) in Canada.
Source: Better Dwelling.
The Canadian debt problem is so large, the numbers have stopped meaning anything to many. Canada’s HELOC problem is significantly larger than the US, when looked at on a per capita basis. Quite the accomplishment, since history remembers the 2007 US binge as a time of greed, excess, and ignorance. Meh, probably nothing.
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