Canadian real estate sales are largely dependent on household credit growth. Over the past few years, we’ve seen consumer credit soar, largely due to extremely low interest rates. Now with our first interest rate hike in years, we’re finally starting to see a change. Numbers from the Bank of Canada (BoC) show that the short-term trend is quickly falling below the long term. This deceleration of credit growth could have a big impact on consumer spending, especially in the residential real estate sector.
Deceleration of Debt, And Recessions
Deceleration of debt is a good thing, but there’s usually a hangover from the debt binge that occurred during the boom. Canada has seen a significant portion of economic activity linked to the growth of household debt. While that’s not necessarily a bad thing, the deceleration of debt creates a kink in the road to prosperity. A change to the way people spend is going to have a fall out in industries closely related to that debt growth. In this case, that would be real estate, and related industries. Watching for a deceleration in credit growth helps us anticipate these changes.
None of us can see the future, but there’s a few well tested methods for observing trend changes. One of the most common methods, and one used by the BoC, is comparing a short-term trend to a longer-term. If the short-term trend is higher than the longer-term, we’re seeing a higher growth phase begin. If it’s below the the longer-term, we’re seeing it shrink. Today we’ll be using the 3 month annualized trend as the short term, and the 12 month as the long term.
Household Credit Growth Sees Short-term Trend Fall For 5th Month
Total household credit accumulation is starting to slow. The annualized 3 month trend fell to 4.9% in October, a 5.76% decline compared to the same month last year. This is significantly below the 12 month trend, which currently reads 5.5%. It may not seem like much, but it’s a sharp contrast to last year. Last year we saw the three month annualized trend grow faster than the 12 month trend for two whole years, ending February 2016. This could be the start of a slowdown of household borrowing.
Source: Bank of Canada.
Mortgage Credit Growth Sees Short-term Trend Fall For 5th Month
Mortgage credit growth is the largest component of household credit. It’s also the one that’s most important to the real estate industry, so let’s isolate that trend. The three month annualized trend printed 5.4% in October, a 14.28% decline compared to the growth we saw last year. It was also a decline compared to the 12 month trend, which is 5.6%. The 3-month trend falling below the 12-month trend for four consecutive months is definitely a sign of slowing mortgage growth. This slowdown is ahead of new mortgage rules, anticipated to shrink credit growth even further.
Source: Bank of Canada.
Slowing credit growth is the healthy thing to do, but will obviously have some consequences. Altus, a leading provider of real estate analysis, is already anticipating next year’s mortgage stress test will lead to less residential sales. They anticipate the decline in buying activity will lead to a loss of 12,000 jobs in related industries. The deceleration of credit growth ahead of these changes, could mean worse numbers than they are anticipating.
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