Canada

Canadian Credit Is Decelerating, Mortgage Growth Falls To Lowest Rate In 17 Years

Canadian real estate sales are feeling the pinch of higher interest rates, and consumer credit isn’t far behind. Bank of Canada (BoC) numbers show household debt printed a new record high. Despite the record high, the rate of growth continues to slow for consumer debt levels. The decelerating growth is yet another indicator that the credit cycle has peaked.

Credit Cycles 101

To really understand why today’s data is important, you need to know the basics of one thing – credit cycles. Credit cycles are a huge topic, so we’ll stick to the basics – expansion and contraction phases. The expansion phase of credit trails the expansion in the business cycle. During this phase, assets and investments increase in value. The increased “wealth” is then used to make even more money, via the power of leverage (a.k.a. credit). During this phase, banks are very eager to issue loans. Consequently, credit balances inflate very quickly during the expansion phase.

When the business cycle peaks, it begins to decelerate, and so does credit. Assets and investments slow in appreciation, leaving less cash flow. This has the opposite impact, and banks tighten lending requirements and raise rates. The reason is, less cash flow means more risk, and a higher risk of borrower defaults. Higher interest rates shrink the credit pool, along with demand for loan originations. Existing debt holders then focus on deleveraging, and credit enters a contraction phase. Capisce?

Canadian Household Credit Is Up Over 4%

Canadians hit a new all-time high for household debt. The total debt at all institutional lenders hit $2.119 trillion at the end of May, up 4.41% compared to last year. Residential mortgages represented $1.50 trillion of the debt pile, up 4.41%. Consumer credit represented the other $608 billion, up 4.42%. If you’ve been following these numbers closely, you’ll notice that the rate of growth is slowing quickly.

Canadian Household Debt Outstanding

Total debt held by Canadian households, in Canadian dollars.

Source: Bank of Canada, Better Dwelling.

Canadian Mortgage Growth Rate Drops Over 30%

The big takeaway is rapidly decelerating growth in mortgage credit. The growth rate in outstanding mortgage credit fell to 4.41%, nearly a third lower than the same month last year. Consumer credit falling to 4.42% seems a lot less severe in contrast, falling “just” 4% from last year. For context, mortgages are now at the slowest level of growth since August 2001. The rate of consumer credit growth is now at April 2017 levels. Historically, both growth rates have only dropped together before and after a recession.

Canadian Household Debt Change

Annual percent change in debt held by Canadian households.

Source: Bank of Canada, Better Dwelling.
Canadians have been pushing new debt records for some time now, decelerating growth is a good thing. However, correcting and deleveraging a credit driven economy is never an easy road to go down. The BoC is going to have a tough time deciding whether they should be hiking rates later this month.

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35 Comments

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  • Trader Jim 5 months ago

    “At institutional lenders” is a key point. There’s even more debt the government isn’t considering, issued through private and foreign lenders.

  • Mortgage Pro 5 months ago

    The important thing to remember is immigration is net positive, so a contraction in Canada looks like a low growth. We could be in the contraction phase, but we would need to balance the numbers against new immigrant lending.

    Only StatCan could probably conduct such a study, but it’s not in their best interest to produce a data point that isn’t pro-Canada.

    • Doug 5 months ago

      Can you elaborate? Isn’t a contraction a contraction?

    • Bluetheimpala 5 months ago

      New immigrant lending is a contradiction in terms and indicative of the problem. Your industry views migration as new blood to suck;welcome to Canada let’s fudge your numbers, get your sponsor to back the loan and then saddle you with debt. Oh and now you’re underwater. Your narrative is comical. But you and your ilk caused this mess. Live in the light. BD4L.

    • Justin Thyme 5 months ago

      I agree with what you are saying. Sort of like the company is selling at a loss, but making it up in volume (cash flow).

      If there is one sector of the economy that is feeding the growth, and this sector happens to be growth from the outside, then if you remove this sector from the data, the foundation economy is actually contracting.

      I suspect you might be correct. Although white male supremacist entitled elitists equate immigration with ‘refugees’, the reality is that most immigrants are contribution-positive. Out of 300,000 immigrants, only 50,000 are ‘refugees’. The rest are unsponsored, economically independent, with significant means. They were well off and well educated in their home country before coming to Canada (a requirement for them to be considered), and their children are just as educated, if not better educated, than Canadian children. They were middle class or better where they lived, they continue to be middle class here. They came here with money, they invested that money, and they are driving new small business growth.

      In fact, ‘non-refugee’ immigrants per capita contribute more to the Canadian economy than do ‘old stock’ Canadians.

      https://www150.statcan.gc.ca/n1/pub/11f0019m/11f0019m2016375-eng.htm

      Actually, I strongly believe that the backlash against immigration is because they are doing much better overall than ‘old stock’ Canadians, and quite frankly, it is pure jealousy. They have far greater motivation, they have a much stronger work ethic (getting into Canada is not easy, they had to put significant effort into it – effort, ambition, and drive that continues once they get here). But nonetheless, without their success, Canada would be much worse off than it is now.

      That is the difference between old stock Canadians who feel they are ENTITLED to a good life, with minimal effort, and immigrants, who KNOW they have to work hard at it, that it will not just be given to them because they are, well, entitled to it.

      The bottom line truth is, that yes their children are probably going to be a lot better off than ‘old stock’ Canadian children, simply because they are so motivated and driven.

      More than half of the graduate students in American colleges are foreign born, or children of foreign born parents, simply because the children of ‘old stock’ American parents just don’t think they NEED to be either skilled or educated, that they will just be handed a well-paying job without any effort on their part. ‘Mom and dad will always provide, why should I bust my ass?’

      Then, when the foreign-born DO get ahead, they claim ‘foul’ and ‘unfair’. That job should have been THEIRS! That house should have been THEIRS! They got here FIRST!

      What do you MEAN, I have to WORK for it? What do you mean, they have to EARN it? The great millennial chant.

      • Bluetheimpala 5 months ago

        While I agree 100% that non-domestic migration is positive(Canada is a country of immigrant) I think it is dangerous equating the output of new immigrants to those who have worked hard to lay roots and grow. The false narrative with the GTA and Maiy Toronto is that foreign immigration creates an immediate or near immediate boost. They come here with sacks of cash and the first thing they do is buy a house. It does not and when a HH has to have a min $120k HHI to afford anything, including a 20-30% down, the hard working foreigners propping up a market has been disproved. 10-20 years later, sure and we know the gap is reduced with subsequent generations but mortgage bro is suggesting it can be sustained. It cannot.

        • Justin Thyme 5 months ago

          The article from the Government of Canada statistics web site says it all. It is very clear about the time lines. It takes four years on average for immigrants to settle in, become established, and become productive. However, these new Canadians are more likely to start a business that employs other Canadians than are ‘old stock’ Canadians.

          Just look at the number of ‘ma and pa’ stores in metropolitan Toronto that are foreign owned. Those foreigners behind the counter are not employees, they are the owners. It makes sense, since these people are coming from areas of the world where people do not work for others, they work for themselves. South Asia, for instance.

          • Justin Thyme 5 months ago

            A quote from my referenced source (GoC web site)

            ‘Immigrants are entrepreneurial. In the first few years after entry in Canada, they understandably have relatively low rates of business ownership and job creation compared with the Canadian-born population. But these outcomes change quickly with years spent in Canada, so that after four to seven years, the propensity to own a private incorporated business or to be unincorporated self-employed surpasses that of the Canadian-born population.’

      • vnm 5 months ago

        JT: “What do you MEAN, I have to WORK for it? What do you mean, they have to EARN it? The great millennial chant.”

        Considering it’s in fact the boomers benefitting from an unprecedented
        20 years of asset appreciation, with no significant increase in skills, productivity or corresponding income, what you are describing is the boomer national anthem.

        • Justin Thyme 5 months ago

          The boomers are the parents and grandparents of the children who have adapted this attitude. Whether or not they are the cause or the symptom is irrelevant to the argument.

          What is relevant, is that the children in the developing world were never exposed to this phenomena (the exponential growth from the 60s through the 90s) , and thus have a temporary immunity from the affliction. They have a strong sense of and desire to make things better for themselves through hard work and study that is drilled into them. (The philosophy of the early last century in America – the ‘golden age of opportunity’. The philosophy of the boomers’ PARENTS). They don’t expect to be handed anything. Now that the developing world is itself reaching maturity, it is interesting to speculate if their children will fall into the same sense of entitlement. Are they just delayed by 100 years or so?

  • TO Millennial 5 months ago

    If credit growth is slowing, why are condo prices still rising in Toronto?

    • Joe 5 months ago

      Condo prices are a lagging indicator. They are more akin to the band playing on, long after the Titanic has hit the iceberg. Party on!

      • Michael 5 months ago

        I’m curious, as anyone seen what the sales volume vs price was like in the last couple of months in the condo market? From my observations 2 things are happening the prices are growing but the sales volume is decreasing can anyone confirm if my observations are correct or point me to a good place to find that sort of data?

    • Justin Thyme 5 months ago

      New condos are marketed and sold even before construction is started. The sales contract and price is firmed up over a year in advance, but the actual closing is much later. Thus. closing price is well out of date.

      It is not the current closing price that is significant, that is ancient history. It is the future closing prices that are meaningful.

    • Erik 5 months ago

      With single detached prices high, and tighter bank lending, first home buyers and investors turned to cheaper condos. So prices continue to rise even as we start to see the beginning of the correction (crash?) .. most people are still in denial it can happen in Canada…

  • Tim2 5 months ago

    observations over ladt 2 weeks. A friend of mine was looking at condo rentals in north east GTA. She said in almost all instances the owners/landlords were marketing for lease/sale and preference was to sell right away……she lost out on a number of these as she was looking to rent only.

    this is at some of the “newer” boxes in the sky developments =)

    Were poorer than we think. Wait till Nov =(

  • Ken Wu 5 months ago

    According to that last graph we never left the recession. The only people who think there was a recovery are those in the housing industry, who got the bubble economics.

    • Justin Thyme 5 months ago

      Something happened in 2008-09 that changed all the rules completely.

      Absolutely nothing has happened since then that follows the ‘old’ rules.

      So making predictions on what is happening currently, based on trends and analysis of curves and metrics before 2008, is just pure groundless speculation. Not until the new rules are defined and stabilized and the new trends analyzed can any predictions be made with any certainty.

      However, that is not to say that predictions about human behavior can not be predicted by past behavior.

      For example, there is absolutely no precedent for the behavior of the stock market since 2015. It just isn’t behaving in any fashion the way it ‘should’. For over a year, it blasted into the stratosphere, like a motor in thermal runaway, and then suddenly over the last six months it just flattened. Now, it is ‘hunting’ for where it wants to be, Going up-down-up-down-up-down erratically. It reminds me of an electric circuit or mechanical system that has gone into oscillation. Or perhaps like a heart beat that is in drastic need of a defibrillator.

      Something ‘broke’ in 2009, and the damage appears to be permanent.

      • Michael 5 months ago

        I would argue that what changed was cheap credit, money left other assets (that lost value due to cheap credit) and poured money into the stock exchange via retail / commercial investors. Same retail investors dipped into their equity and poured money into real estate with the help of less than honest mortgage brokers up until b-20 you could find a friendly face at Scotia or TD the bank to look the other way for about $2000 per mortgage. Has any one seen what happened to the rental market at the end of the last RE bubbles ? Did the rates go down or stay the same?

  • Justin Thyme 5 months ago

    The patient is bleeding to death, but good news, we are slowing the rate of the bleeding.

    OOOps.

    Isn’t the only way to prevent death is to STOP the bleeding? Slowing it really isn’t a reason for optimism.

    • Bluetheimpala 5 months ago

      It is an internal hemmorage. A tourniquet won’t work. Signs of hope slowly fade despite what seems like improvements to the patient’s health. Loves ones hold on because ‘this time is different’ or ‘it won’t happen to me’ but in the end all we have is ashes. BD4L.

      • Justin Thyme 5 months ago

        I suspect you are correct about the ‘internal bleeding’ part.

        It doesn’t show up until after the patient is dead, on autopsy, unless skilled internal diagnostics are used.

  • @xelan_gta 5 months ago

    Couple of interesting articles for you:
    Australia has very similar to Canada and they have RE slowdown as well.
    Big difference is that Australia doesn’t raise their rate at all and market is still correcting.
    Don’t put too much hope/blame on interest rates decisions.
    https://www.bloomberg.com/news/articles/2018-07-03/australia-holds-key-rate-as-currency-drop-offers-export-support

    • @xelan_gta 5 months ago

      Second one about same Australia and it has an important conclusion:
      “And investors – a huge force in the market – have suddenly lost their appetite for property speculation, and banks have lost their appetite for funding them.”
      https://wolfstreet.com/2018/07/02/deflating-house-price-bubbles-sydney-melbourne-australia/

      Market sentiment is a key with bubbles and it’s definitely changing in Canada similarly to Australia.

      • Bluetheimpala 5 months ago

        If I recall every G7 is at the peak of a real estate super cycle. Low rates are like a stripper, you only know how much you’ve lost once the music stops. This will go down as the biggest wealth stripping history. It will be taught in economics classes. BD will go down as the lost book of jebus.

        • Lessdanadalla 5 months ago

          I can’t agree more …

        • Justin Thyme 5 months ago

          The lost book of Jebus? Jebus was an alternate name for Jerusalem. Which ‘lost book’ are you referring to?

      • Justin Thyme 5 months ago

        Australia had a unique social security net system. Young people could get an ‘advance’ on all of the government social programs – welfare, unemployment insurance, child benefit payments, old age security, and such (I believe even tuition grants), in a one time deal, and use it as a down payment on their first home. The catch was, they forfeit all future social security net payments and programs.

        Not sure if this program wound down.

      • Justin Thyme 5 months ago

        A quote from your reference

        ‘ Banks are suddenly focusing on borrowers’ debt-to-income ratios and other specifics, rather than just the assurance that home prices will always rise. ‘

        So apparently there was no debt-to-income stress test in Australia in their MAIN banking industry? That’s just bonkers.

  • Justin Thyme 5 months ago

    An interesting read for those so inclined.

    ‘CATASTROPHE THEORY IN EXPLAINING PRICE
    DYNAMICS ON THE REAL ESTATE MARKET’

    from https://www.degruyter.com/downloadpdf/j/remav.2013.21.issue-3/remav-2013-0026/remav-2013-0026.pdf

    “The real estate market is an open system, which implies that it is able to exchange signals with other open systems and dynamic systems. The evolution of a market system over time can be described mathematically. If the system’s sensitivity threshold to external stimuli is exceeded, it becomes destabilized and moves from a near-balanced state to a state that is far from equilibrium. Those
    dynamic processes often induce key changes in the system’s trajectory of evolution. In search of equilibrium, the system becomes transformed in a process of discontinuous and discrete changes in state variables. The above statement constitutes the research hypothesis in this article. ”

    “1. Introduction
    The presented interdisciplinary study verifies the usefulness of research methods applied in mathematical and nature sciences for analyses of the real estate market. Greater emphasis will be placed on the examined methods’ ability to describe the events and processes on the real estate market
    in qualitative rather than quantitative terms.
    The past decade witnessed sudden changes in real estate prices on many markets. Those changes decreased the credibility of economic decision-making and prognostication based on classical methods for investigating the variability of property prices, namely linear and multiple regression analyses. In the existing literature, the fluctuations in real estate prices which significantly diverged from long-term market trends were regarded as insignificant adjustments of current trends and a part of market noise. The importance of those events was generally minimized. This study aims to introduce into scientific discourse a specific language for describing the phenomena which are
    observed on unstable real estate markets.
    The study was carried out in the city of Olsztyn in north-eastern Poland. The proposed method can be applied to various local markets in Poland and in other countries. The study analyzed changes in the prices of apartments in 2001-2011. The source of the analyzed data was the Register of Real Estate
    Prices and Values kept by the Olsztyn City Office. ”

    Executive sumary

    Catastrophe Theory is a relatively new branch of mathematics and physics, also now being applied to social science and economics. that purports to explain systems where there is a change in external and internal forces, not in themselves particularly eventful, but collectively happening such that a cusp is reached, and the equilibrium of the entire system is suddenly and dramatically changed. The combined stresses in the system, each one individually managed and predicted, and each one not significant of imminent danger in and of itself, all combine through multiple points of instantaneous failure that lead to the failure of most, if not every, system. It is not the result of a single failure, or a single stress, but the coalescing of multiple stresses that reach a cusp. The sudden collapse of the twin towers, for instance, where the entire structure suddenly changed in equilibrium from a very stable structure to a completely unstable structure in a matter of milliseconds, the result of multiple individually manageable stresses on the structure all combining to exceed multiple critical thresholds. The cusp is reached, and the building fails catastrophically and completely. (Yes I have seen the engineering analyses, the calculations, the facts and the figures, the models and simulations).

    When applied to economics, it purports to explain how economies that are stable and predictable, and which follow well defined and understood rules, suddenly change to a completely new equilibrium following a completely different set of parameters. The equilibrium change is sudden and dramatic, such that there is no continuity in any curve between the before and the after point. Every metric curve suddenly and dramatically changes. There is absolutely no linear progression of any metric through the cusp. Every curve is discontinuous at the cusp.

    That, I am afraid, is what we are heading for in our economy in general. Not just the real estate market, not just in Canada, but across the entire globe. Multiple stresses, all coalescing into one cusp, that will switch equilibrium suddenly and, well, catastrophically.

    An economic catastrophe (in the true sense of the definition in the theory) that is sudden, and through which no economic curve remains continuous.

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