Canadians still have access to cheap credit, but it’s disappearing fast. Bank of Canada (BoC) numbers show the cost of borrowing is rapidly increasing as of last week. Over the past two years, a typical household loan has seen servicing costs rise by nearly a third.
Effective Borrowing Rates
The effective borrowing rate is the typical cost of borrowing for consumers. The number is a mix of mortgage and consumer rates, including discounted and posted. The data is from residential mortgage and consumer credit reports, as well as institutional lenders. A lot of analysis uses the 5 year posted rate, which is fine, but not a fair comparison since who pays the posted rate? Exactly. No one with decent credit who’s ever asked if they could get a better rate. The rate isn’t a perfect measure, but it gives us insights on credit tightening and the cycle.
The Typical Canadian Borrowing Rate Is Now 3.96%
The typical borrowing rate jumped to a multi-year high last week. The effective borrowing rate increased to 3.96% last Friday, up 3.39% from the month before. Rates are now up 15.78% higher than they were around the same month last year. That means borrowers today are paying up to 15.78% more interest to borrow the same amount. It’s a big jump in a short period of time, and almost half of the increases from the all-time low.
Canadian Household Borrowing Rate
The Bank of Canada’s weekly effective borrowing rate for Canadian households. The number is a weighted average of interest rates on mortgage and consumer credit products.
Source: Bank of Canada, Better Dwelling.
Borrowing rates have increased significantly from all-time lows. The lowest Canadians have seen is 3%, last observed in November 2016. Over the past two years, we’ve seen this number jump a whopping 32%. That means the typical households is spending almost a third more on interest payments. Variable loan borrowers have already seen the extra money vanish, or principal contribution drop.
Hoping rates drop again? That may be a possibility, but the BoC is currently moving towards a neutral rate policy. Unless we see a major change in the macro environment, don’t count on rates to fall in the near term. If you’re on a variable rate loan, you should plan for spending a little more on servicing costs in the near future.
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Important point that this cost is rising, while HELOC debt is ballooning. HELOCs are variable rate, callable loans. When rates rise property values drop, so these borrowers are going to be hit with BOTH rising rates that increase the cost of carrying debt, falling values due to the repricing of assets that always occur with rate normalization, AND left dealing with a real estate economy.
Debt time bomb. Not sure why the government is pretending things are going to be alright, they should be scaring some sense into these people. These are the same buyers in Ontario that the government almost had to create a mandatory retirement contribution because they’re so bad at planning their future.
My only guess is that the Gov doesn’t want to create a panic, preferring to kick the can down the road a bit and squeeze whatever else they can out of this run. Instead of giving people the understanding they need to make an informed decision, they repeatedly state that the probability of a housing market correction is “low”.
Anyone who understands the basic credit cycle can see where things are heading. Furthermore, as our economy is so heavily weighted on construction and RE, things look pretty bleak for Canada.
Don’t forget how this impacts borrowing. The rise by itself is a reduction of -11% in borrowing power, but also drop another few points for the stress test. With the stress test included today, which wasn’t included in 2016, you’re looking at a 29% decline in home buying power.
Yessir. That’s why we’re seeing a huge drop off on luxury. You can’t push the budgets to the max, which is a really good thing in this environment. OSFI is giving a capital buffer to households before monetary contraction occurs.
This is producing some odd behaviour in my neighbourhood. Homes that differ in size, that should have a big difference in price, are both priced the same. Its like they are competing for the same purchasers at some new credit ceiling.
But it only goes up.*
*interest rates.
The general population’s lack of understanding of the impact of interest rates on asset prices is astounding.
It’s going to be a rough ride for Canadians, and I feel sick to my stomach for friends of mine who have just recently jumped into the market.
Not sure where people picked up, rates get cut – prices should go up! Rates rise, prices should go up!
have any of you commenters made money in RE? are you all waiting for crash/correction and then jumping in for next cycle? seems like a forum for a bunch of losers who lost out on the great RE gains in the last decade. All I know is that many of my friends and colleagues made a killing in RE investment. these are people that are scared to invest a single dollar in stocks. they are laughing all the way to the bank. you find bears in the circus but bulls at the rodeo.
The funny thing about people that are scared of the stock market is they usually have no idea how to properly account for an investment. The gains you made on any real estate in Canada were dwarfed by the gains made in US equities. In fact, the gains on Toronto real estate can be mostly matched over the past years by just holding US dollars. Not any sort of equity strategy. Literally not holding Canadian dollars nearly matched the gains.
Yes, my house is worth more than it was a few years ago. It’s also less than 10% of my net worth, whereas people that are still real estate bulls (AFTER A 30 POINT RISE on an inflation sensitive asset) are about 70-80% real estate. Not one family office would recommend more than 20% in real estate, but that’s because people with real amounts of money know that real estate has only produced value in Canada over the past 5 years.
Anything before that and the cost of borrowing was high enough that it would have wiped out any gains. More important: Bears at the circus die by old age. Bulls at the rodeo get fat, chase a drunken cowboy, and are slaughtered when the cowboy is done.
Once again, the brilliant arguments of the bulls shine through. The main line goes like this:
“I made money in Canadian real estate during the greatest run up in Canadian real estate history, therefore Canadian RE isn’t overvalued and is a great investment.”
The smugness of the extremely limited thinkers is truly remarkable. Hyuk hyuk! I bought house and made money! I so smart! I buy more house. Make more money. More smart.
Yeah I made a lot in real estate in Vancouver. Offloaded everything before the market crashed. Betterdwelling, greaterfool, talking to insiders, analyzing the stats, and even following people on Twitter helped me understand when the music was going to stop.
FYI, a really good indicator for when to ditch your spec real estate is when the established local developers stop buying land. They know the most about where the market is going. If you are buying when most of them are not, you probably aren’t going to make any gains on your purchase. If they are selling their sites, then you better list whatever you have for sale the next day.
I think most developers nowadays are net sellers – flogging their exposure through presales.. I wouldn’t touch any presale contracts with a ten foot pole right now
Last year, I went to an open house in Ajax, was listed for $400K. It was a co-op type townhouse. Size 2X2. When I complained about the price being unrealistic. The relater said what do you get in market for less than 500K, look at the condos! Just noticed, it has been sold for $436K after almost 1 year.
So whats the essence of The RE market in Canada is as follows:
One realtor who was trying to sell $800K new bungalow in $400K market in 2016 in Winnipeg. Said to me ” I don’t need 20 customers those are rational and do their home work. I need only one who loves it at first sight and Pays $800″
Means: 1 fool is enough and they are waiting for that 1 only to set the market trend, not for the rational and well researched buyer.
Hi,
This article on the InnovationExcellence blog article about better interest rate management appears to be right on the money :https://www.innovationexcellence.com/blog/2018/04/06/what-innovations-are-needed-for-better-mortgage-interest-rate-management/. What do you think?
Fuck off john. Go get traffic off some other site. BD4L.
HI Bluetheimpala. Not my website! If you think Andy Haldane, The Chief Economist at the Bank of England is wrong and we should not be discussing this Infotech issue in the Innovation Community that is okay with me, but for readers it is mistake. Best.
This comment by Blue seems to be right on the money John. What do you think?
Someguy,
I think that you have the same problem as Australia: http://www.rbcgam.com/investment-insights/research-publications/_assets-custom/pdf/rbcgam-economic-compass-canadas-debt-threat-201107.pdf. There is one thing for sure if you don’t talk about the problem and solutions you will finish up with the same problem as the UK: https://www.moneyadviceservice.org.uk/en/articles/negative-equity-what-it-means-and-what-you-can-do-about-it. Agree?
So is the sentiment like that now for City of Toronto (416 region)?
Bears = Don’t buy RE, offload/sell as soon as possible.
Bulls = Good buying opportunity now, better get in the market before it starts going up again.