Canadian Consumer Credit Growth Is Decelerating, Here’s Why That’s Bad For Real Estate

Canadian Consumer Credit Growth Is Decelerating, Here’s Why That’s Bad For Real Estate

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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  • Trader Jim 5 years ago

    This is gold, analyzing credit growth trends like a stock. The BOC really needs to start listening, this is a huge issue.

    One more concerning thing to mention here is that as rates climb, the growth is built into existing debt. If growth is falling, while rates are climbing – the general market is a lot worse than people think it is.

    This isn’t just housing btw. It’s the same trend that would apply to any large asset that is typically financed. Cars, large appliances, home renovations, etc.. Big headwinds ahead, and it’s not going to be pretty.

    • bluetheimpala 5 years ago

      Jim, this sounds like we’re going to get ‘double dicked’ to use Keynesian terminology…aggregate demand in the economy is going to tank as a result of these two factors combining like voltron. Toss in a stock market correction and a natural housing downturn which we’re already seeing and 2018 looks like it could be a bust. Are you anticipating some shrinkage at all? Q3-Q4 recession?

      • Tommy 5 years ago

        Your doomsday scenario is a bit over the top haha. The market has undergone one round of uncertainty after another due to government interventions. We may experience a dip for several years but the overall trend in Toronto is no different than it was for NYC 30 years ago to present. If we’re fortunate to see prices decrease, try to have liquid capital available to buy real estate at that time. You’ll be happy in another 10 years.

    • C 5 years ago

      What do you mean by “growth is built into existing debt”?

      • bluetheimpala 5 years ago

        When growth is funded through debt, the underlying risk is interest rates and by extension creditworthiness/value of the asset tied to debt or the ability to service debt. While it is tolerable when rates are uber low as they creep up, discretionary income gets hit; people don’t want to lose their house because they couldn’t stop themselves from eating out or engaging in consumers spending in general. People don’t default on their house before they default on their lifestyle. Well some do, but they are hedonistic pricks; if a ‘purge’ were implemented would surely be the first to go…

  • Michael Z. 5 years ago

    Honest question. You guys were cheering on credit deceleration, now you’re warning about it. Why the sudden change of mind, and is there any way to avoid it? Thanks in advance.

    • Alistair McLaughlin 5 years ago

      Credit deleveraging is both necessary and unpleasant. That is why it is something to be both desired and dreaded. Compare it to chemotherapy. Absolutely necessary, and the patient looks forward (hopefully) to improved health in the end, but the road to get there is full of pain and misery. And we don’t know how long it will last.

  • Irving F. 5 years ago

    You know what this proves to me? People have no sense of humour.

  • Ham 5 years ago

    Good news! Looks like the government efforts to tame the sky high debt level is starting to show effect. The recent slowdown in realestate sales seems to be nicely reflected in the tapering borrowing growth.

    Any way we can find out if this trend is solely due to the slide in realestate sales number we saw this year or impact of two rate hikes?

  • Justin Thyme 5 years ago

    So what happened in 1990?

  • Justin Thyme 5 years ago

    Feb. 2009 classic example of a dead cat bounce.

  • Justin Thyme 5 years ago

    Both graphs really, really want to be around 5%.

Comments are closed.