Canadian real estate owners made a record gain when prices soared, and they’re in a rush to spend it. Office of the Superintendent of Financial Institutions (OSFI) filings show the balance of loans secured by residential real estate hit a new high in May. The high was led by a surge in personal loans, such as HELOCs.
Loans Secured By Residential Real Estate
Loans secured by residential real estate is a popular form of debt for Canadians. There’s tons of different types, with the most frequent type being a home equity line of credit (HELOC). All of the loans work the same way, allowing you to access equity in your home, by borrowing against it. When home prices rise quickly, it’s sometimes viewed as a quick way to realize those “profits.”
Debt is debt, but not all debt is a negative indicator. Regulators split these types of loans into personal and business as a result. Personal loans secured by residential real estate are typically for consumption. They’re an important part of Canadiana retail sales, but generally they’re not great. Business loans secured by real estate is generally a calculated risk, so it’s not as bad. Borrowing for personal consumption leaves questions about how they’ll pay back the debt. Business borrowing implies confidence in market conditions to expand their business. That’s why they’re separated.
Total Debt Secured By Residential Real Estate Hits A Record High
Total debt secured by residential real estate hit an all-time high. Filings show $284.8 billion in outstanding debt secured by residential real estate. The annual pace of growth increased to 5.44%, which is actually higher than last month. Following five months of annual growth decelerating, we’ve got our first bump higher.
Total Loans Secured With Residential Real Estate
The total of personal and business loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Personal Debt Secured By Real Estate Now Sits At Over $256 Billion
The vast majority of that debt was for personal consumption. Over $256.8 billion of the total was for non-business purposes, up 6.22% from last year. The borrowing bing did reach new highs, but annual growth did taper for the third month in a row.
Personal Loans Secured With Residential Real Estate
The total of personal loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Business Debt Secured By Real Estate Declines Rises
Loans secured for business purposes were below highs, but did jump from the month before. The outstanding balance stood at $28.04 billion in May, down 1.16% from last year. This is the second month we’ve seen negative growth, but the size of the declines tapered. It’s too early to tell which way this trend is heading.
Business Loans Secured With Residential Real Estate
The total of business loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
The rise in HELOC debt itself is relatively harmless on the surface. There’s not much harm other than a few extra dollars going towards debt servicing, right? What they’re using that debt for is the concern. Increasingly debt experts have been seeing HELOCs used to delay personal bankruptcy, and banks have been urging people to use them to buy additional homes. This works as long as prices continue to rise, but can amplify shock in the event that home prices fall.
Like this post? Like us on Facebook for the next one in your feed.
If the rise in consumer spending was supported by rising real estate values, and not wage growth, has anyone considered what happens to the economy when prices stop growing? Even in the industry’s best case, prices stall forever scenario, the economy gets a gut kick.
There’s a BD model kicking around trade desks showing the impact to Toronto retail, from just the decline in sales.
I believe it said the impact to Toronto retail works out to $1.5 billion so far, about half a point of Toronto’s GDP. That’s a hefty hit considering GDP growth came in at 2.2% in nominal terms last year. That brings GDP to 1.7% for the region, just on the retail hit, meaning we’re going to need a *lot* of growth in other areas.
That doesn’t even include the lost commission and HELOC removal from spending. Rough ride ahead.
Let’s not forget how many of these people are taking out a HELOC in order to fund someone else’s private mortgage. It’s not uncommon for people to think they can borrow at 5%, and lend out at 10% hoping they get all of their payments back.
Once these people paying 10% or higher can no longer make their payments, HELOC borrowers turned private lenders become a liability. The amount of leverage being used today is epic.
Or investing in syndicated mortgages.
What are people doing with all of this money? People have as much HELOC debt as they did total debt just a few decades ago.
Buying more homes. One of the better but less talked about stats from this site was here. Almost no discussion, which kind of surprises me.
https://betterdwelling.com/so-are-we-talking-about-these-canadian-cities-where-multiple-mortgages-are-rising/
Putting down payments on second and third homes as investments. Too many average households doing this with their bubble equity.
I see a lot of brand new Mercedes, Range Rovers and a few bentlys in my condo’s garage in the core.. wasn’t like this 4 years ago
Actually, based on the latest MNP surveys, they’re using them to keep their heads above the water (i.e. borrowing to pay exiting debts)! It’s a shit show of monumental proportions and it’s going to stink big time when it hits the fan! 😉
Not encouraging more debt, but if someone uses HELOC to borrow money instead of credit cards, then it’s much better/smarter way as interest rate is much lower than credit cards.
Obviously it’s not good if people borrow too much… But in the end we live in debt driven economy (financial system). This is how our system is designed to work.
Imagine for a second that banks stopped giving mortgages all together… and stopped issuing credit cards… and stopped giving lines of credit… That would instanteneiusly fix this bubble and prices would fall 10+ times. But economy would stop as well.
So where is the right balance between borrowing/debt and keeping economy going?
There is no good answer and thus we will always go through these “cycles”… But I have a feeling that next bust will be bigger than ever before. Because debt is at highest levels ever. Someone would need to pay for this one day..
And not just Toronto housing but whole world economy.
Once you realize that governments lie to you, it starts to make more sense. Debt driven growth is the substitute we’ve invented as a result of free trade. Free trade improves profit margins for companies, but offshores jobs. Rather than seeing improvements in GDP through higher amounts of domestic consumption, we now need to drive debt and deflate the value of that debt through inflation. Since inflation isn’t properly calculated, we think it’s much lower than it is.
Yadda yadda yadda.
American consumer demand has saturated. The only growth for American production is the export market. The export market depends on other countries having money. The only way other countries can have money is if they produce. The only way they can produce before they have a strong domestic market is to export.
Free trade is the ONLY way for growth to occur when population growth is stagnant.
But wow. BD has finally come to the attention of the Russian bots, and they have infiltrated. Look out, here comes the flood of misinformation and demoralizing propaganda.
Consumer ‘demand’ boils down to one thing; discretionary income. Basically: What’s your kitty after ‘the man’ and life (housing, fixed expenditures) claw it away from you? Turns out, as KS notes that our ‘growth’ has been driven by debt because wages are stagnant as companies offshore to increase margins. What is interesting is that while we were piling it on so were other markets, much less developed and less savvy markets. All G7 countries have too much debt; both consumer and corporate BUUUTTT…look at china for example. Pure export economy that is sturggling to grow up and, unfortunately, has failed on numerous ocassions due to government intervention/manipulation. China can NEVER deleverage from t-bills; their entire system is propped up by the US backed bond market. Their stock market is a joke with some bluechip stock trading like pennies with 10% swings each week based on ZERO fundamentals. There is no free market as all of the large companies are state-backed. So the chinese have no money and Xi has cut it off for the rich. Our domestic income can’t support the debt levels that underpin the asset price. Everything is fueled by debt which is getting cut off. Now BC, the shit slurry, is cracking. I wonder how this will end? I guess we will never know. Tick tock. BD4L.
So it’s pick on China time, eh, Blue? There is a lot you need to learn about the new economy in China. Stop reading Western financial papers.
‘Latest SOE reform to go wider, deeper’ from http://usa.chinadaily.com.cn/a/201807/25/WS5b57b52ca31031a351e8feab.html
A country that raised 800 million people out of poverty and into the middle class in only 20 years, and they don’t know what they are doing? A country that has introduced universal health care, and has raised the life expectancy of their citizens to the level of Western standards, in a decade, and they are struggling? A country whose growth rate has FALLEN to 6.2% year over year, that country?
Seems to me China is the only country that actually knows what it is doing.
And yes, they have achieved it, in part, on consumer debt. Buy now, produce now, expand now, pay out of future income. Same thing that drove the American economy through the 60’s and 70’s. A time where wage inflation made the debt look ridiculously low when it came time to pay. Borrow $100 today when your wages are $200, pay it back when your wages are $2,000. And why are your wages now $2,000? Because all the demand from buy-now-pay-later has created massive investment in manufacturing, resulting in massive increases in well-paying jobs.
China is re-creating 150 years of Western growth in only 20 years, using the same prolonged process, only condensed, because they have learned, and have mastered the process.
So why isn’t it working in America any more? Because American markets have matured, and in fact demand is falling.
Consumer demand is no longer driven by available discretionary spending. In that sense, Keynes never foresaw the world of today. Rich ‘consumers’ are not consuming. Even though they can afford it, they are not buying stuff. They are buying services – vacations, meals out, entertainment, sports, telecom. Over 80% of the American economy is service and financial based. Less than 20% is manufacturing. They are investing. Expanding their portfolios. Things that do not have to be made. Why? The ones that have the money, already have the ‘stuff’. How many cars do you really need? How many fridges, stoves, furniture? Their excess income exceeds their ability to spend it on stuff. Bill Gates could not spend all of his money on stuff, if he tried. Buy 20 SUV’s a day? A hundred fridges? Still would not come close to spending even a fraction of it.
And the bottom segment? They never really did drive consumer demand. They just can’t afford it. They never did have discretionary income. And it is getting worse. There is no such thing as a good paying manufacturing job in America any more. Chinese manufacturing wages are now, on average, higher than American manufacturing wages, once PPP is considered (the Chinese can buy more stuff with less money). Low-income wages are stagnant. Minimum wage hasn’t moved. Low-income Americans are paying off their loans at the same income level they had when they took them out. In fact, I posit that Americans from the vanishing lower middle class are paying off debt at wages LOWER than they were when the original debt was incurred, and they are now struggling to refinance.
So, it’s only the middle class whose excess discretionary income drives demand, and the middle class is vanishing in America. The rich have reached saturation in spending on stuff, and the expanding poor class can not afford it. Excess money is just pooling, instead of being circulated through spending.
Americans are not using debt to buy STUFF, they are using debt to buy MONEY. Either to invest, or to re-finance. The haves are using it to buy Investments, housing, stocks, GIC’s. Banks are not any more stupid than they were before – they lend money only to people who do not need it. You still need to qualify for a HOLOC, you still need the income. You don’t just get one by showing up with equity in your home. Well, maybe a reverse mortgage. Even the cash stores demand that you have a job, with a wage high enough that they can garnishee it, and a credit check to make sure your wages are not already garnisheed. The LAST thing the bank wants is to be stuck with your house. It’s much easier for them to just collect the interest, by garnisheeing your wage.
The rich, the ones that do not need the cash, are driving the debt.
Apple, with their billions in cash, are BORROWING money to buy back their stock. Why? Because interest rates are so low, they make more money on their money by investing it than they pay in interest on new borrowed money.
But yes, I agree that a good portion, though no where near the majority, of new debt is to re-finance debt. But I also would posit that most of this debt is not used at all for consumer purchases of stuff. Not even by the rich.
Oh, and it is the American stock market that is swinging widely, yo-yo like, and definitely not based on fundamentals. Whirlpool, for instance, down 10% in a day. Oh, wait, the Whirlpool stock decline WAS based on fundamentals.
Justin Thyme,
“BD has finally come to the attention of the Russian bots”
Really? theres only 21 comments as of now, You are trying to imply that anyone that agrees with what better dwelling reports on is a russian bot, not a normal human being seeing the light but a bot that has a goal to spread propaganda?
The comment policy does say to act like an adult and not spread conspiracy theory
Agreed
Russian bot agents work in teams of three. that came out in the recent confessions of a former Russian bot.Let’s see, one, two, three. Hmmm.
Russians think that Canadians are just as stupid as Americans, and will fall for anything.
Russian bots have one objective – to instill a general discontent with the government, including calling all government officials liars and incompetents. Seems to fit the evidence.
This whole time I thought it was a secret that people were using HELOCs to fund down payments on second/third homes. Didn’t know that banks openly put it on their website. SMH
So everyone knows what I am going to post, right?
From 2012 to 2016, the graph was relatively flat. Nothing horribly unusual.
From 2016 to 2017, it jumped to a new level. An absolutely huge, disproportionate jump.
From 2017 on, it is relatively flat, but wildly oscillating.
There is a discontinuity from 2016 to 2017. Something drastic happened. Some major shift to a new equilibrium. Once the new level was achieved, the graph leveled back out.
It is no coincidence that the same discontinuity showed up in housing prices, the stock market, the drop in consumer spending, and unemployment figures, non-inflationary inflation, among others. Something really, really drastic changed in the world economy during this period. A ‘for instance’ scenario? ‘ The drastic rise in home prices made the drastic increase in HOLOCs possible. Maybe, the increase in HOLOCS freed up money to be invested in the stock market? Pure speculation, but it illustrates how everything COULD be inter-related. A sudden critical shift and everything changes with it to accommodate the new normal.
Speculating on nit-picky details and metrics is futile. Whatever happened, whatever switched, it was really, really big. Could it be the butterfly effect, where something seemingly small and insignificant, was one straw too many? Probably. But it is the overall picture that is important, not just the trigger. The trigger only set it off because everything else was in a critical position.
I suspect the foundation was laid in 2008, based on a slow change from the 90’s on. The sudden and drastic rise of China? The leveling off of the population curve? The saturation of ‘stuff’ in the Western economy? ‘Dutch’ disease caused by smart phones (especially the iPhone) siphoning off consumer dollars? ( Apple sucked billions out of the economy and hoarded it. Same with Google and Facebook.) ‘Dutch’ disease in the stock market and real estate sector, where the inflationary prices in these two sectors disproportionately sucked hundreds of billions out of the economy? Horrible decisions by governments, altering transfer payments and lack of investment in infrastructure (American highways are abhorrently pitifully deteriorating)? The minimum wage not keeping up with the economy, dropping more and more Americans into ‘working abject poverty’? Severe and drastic drying up of American investment in new production – except for a few rare exceptions, there has been no new manufacturing plant built in America in over twenty years)? The switch of the American economy from 1900’s production (making money by making stuff), then to 1980’s service (making money by providing a non-manufacturing ‘service’, such as personal care, retail, food, education, the military, government), and finally to a ‘new millennium financial’ economy (where making money on money – interest, loans, mortgages, stock market trading – becomes the prime wealth generator) starting in the 90’s? Friedman’s ‘profit at all costs’ mantra, where social responsibility is ignored, and the resulting demoralization of the population – the rise of the ‘greed’ and FOMO mentality? The propensity for American corporations to spend their profits buying market share (other companies, then closing them down) instead of new production?
All of the above? None of the above?
Whatever it was, the graphs indicate that it came to a critical point in 2016 or thereabouts.
The big question is, has everything settled down to this new equilibrium, or are we still in for some more major shocks? Think in terms of an earthquake and after-shocks. A sudden and drastic change to a new equilibrium as a result of built-up stresses coming to a critical point.
It isn’t relatively flat from 2012-2016, from a stats perspective that is not true. The rapid increase is because we are greedy by nature; wage erosion, cheap debt and FOMO means there is/was a ton of stupid money. Plus people did make bank so there is a lot of equity as well. People think they are richer than they think and correlate access to money with having money. This all is ok when things are humming along..I guess. The pop you mention coincides with private lending and people being over leveraged and needing to dip into their equity to keep the wheels on the train. When the underlying asset was appreciating in the double digits there was no need to fund your obligations or your life with debt. Now the asset class is correcting so all these investors are using their equity in hopes they can delay the inevitable. There is no new economy, same old with the same old fundamentals albeit with a slightly different twist. No money = no mas. Love in the light. Don’t spread filth. BD4L.
There is no equilibrium at all.
HELOC balance may be flat, but interest rates are rising so payments become more expensive.
If you take graph of all money spent on HELOC this graph is still trending up.
We will only can discuss equilibrium:
– when rate hikes path is completed by BoC
– no major shocks expected to the economy
– arrears/defaults are not trending up
– unemployment is stable
– household debt levels stabilized
– private lending %market share stabilized
– RE inventories are stable within “balanced market” range
– RE prices stabilized within 0%-3% YoY growth range
– Saving rates are not getting worse
– Foreign investment activity in RE is stable.
– New completions should closely match household formations
Also:
1 year passed after all those conditions are met without any significant worsening in any of those metrics.
Until that happens there is no equilibrium and market will continue shifting.
And nowhere close to equilibrium. It’s like we’ve spent everything moving to Mars, without a shred of thought to how we’re going to get back, and it aint gonna be cheap.
You virtually never see the world bubble mentioned in the media, it’s like it was a thing of the past and at worst a limp market ahead, poised to explode, and the delusion that governments won’t let interest rise beyond what we can afford.
People happily accept a 300% increase in home prices in stride, but a 50% decline … inconceivable.
Vnm,
I pretty much agree 100% with everything you are saying, However you were mentioning that you never see the world bubble mentioned in the media, which I think has changed as of recently. To me it seems like I am hearing more mainstream media actually suggest things are very uncertain, that housing and many asset classes are in a bubble etc.
to me it seems they are not afraid to admit it anymore because they don’t have very many people left to entrap them into debt. Now we just have all the indebted and greedy people just argue thier way out of the possibility that thier decisions might cost them based on the information that is brought forward to them.
Owning a home is one thing but we have truely become gamblers when 2 or more is not enough for us and you need to pull out the previous gains to speculate on it going up another 40% in 1 year
Let’s explain ‘equilibrium’.
An equilibrium point does not need to be positive, nor advantageous. Consider a teeter totter. Two equilibrium points. In one case, your feet are safely on the ground. In the other point, you are high and unstable, with your feet dangling in the air.
So a complete crash of our economy is indeed an equilibrium. The rash of the thirties was an equilibrium – low employment, negative growth, and uncertainty. But this condition was STABLE. Any attempted change to it resulted in a prompt return back to recession. Any factory that hired was just as likely to lay off again very shortly. Growth could not be sustained.
Do NOT make the mistake of assuming that any new equilibrium will entail prosperity and growth. It could just as easily entail poverty and stagnation.
I agree that the new equilibrium has not yet been defined, but the new equilibrium does exist. And no, the after-shocks have not stopped. There are still more change to come. But what will it look like? I really don’t think there is anyone who actually knows. Just lots of speculation. But for sure, like it or not, accept it or not, the sudden and dramatic rise of China as an economic power equal to America, is a very big part of the equilibrium shift, and of whatever the new equilibrium will be. The complete switch from America being 80% of world GDP, to being less than 20% of world GDP today, in a span of thirty years, is certainly a causal factor. And the fact that China is a socialist country, with emphasis on sharing and win-win bargaining, and not an oligarchy like America, with emphasis on wealth accumulation and zero sum bargaining. will definitely shape the new equilibrium. I would posit that the equilibrium shift will be the switch in power from a socially repressive to a socially responsive world order.
But for sure, one of two things will happen in America, in the next twenty years, when everything settles. The key will be what happens to the middle class.
Either wealth will be redistributed through some mechanism, so that the middle class is re-established in America. I suggest that doubling the minimum wage is the best way to do this. That is, the government will become socially responsive.
Or America will descend into anarchy, with a class struggle the likes of which Marx could not imagine. That is, the government will become socially oppressive.
My money is on the later.
What happens in Canada, which still has a very viable middle class, depends on who we align our economy with.
Under ANY scenario, China will probably come out of this as the dominant economy, sooner or later. Probably sooner than later. China is in the same position today with America, as America was with Britain in the mid 1800’s and on. Britain stagnated, and America grew, simply because of the population boom and the rise of the American middle class, that drove demand.
Ford NEW he could sell every car he produced, to the American middle class. All he had to do was make them fast enough, or someone else would. That is no longer the case. It flipped sometime in the 90’s. Now, smart entrepreneurs know that they will sell every car they manufacture in China, and if they do not produce them fast enough, someone else will. The Chinese market is now insatiable, the way the American market was in the early 1900’s, and the American market is stagnant or declining.
The key will be where in the world the new middle class is established and dominates. But world history is emphatic on this – a stable middle class WILL prevail, or we will descend into anarchy and revolution until the middle class DOES prevail.
True dat Vnm. To most people a 300% jump is rational because..what exactly? But a 50% drop–well, that is unacceptable.
yuuuuuupppp!
I wrote this article on Toronto real estate.
Let me know what you guys think?
https://www.linkedin.com/pulse/5-solid-reasons-why-toronto-real-estate-crash-2018-2019-jerry-jhun/
Good work supported by facts but it have some flaws.
Here is my feedback on areas which can be improved if you are interested (I’ll match those with your reasons):
1) Everything is logical but I would not give any prediction on rates because some economists expect much fewer rate hikes than US. Better to leave it up to BoC.
2) B-20 impact will depend entirely on cheating levels. On paper it will remove 12% of all GTA/GV buyers but if people will go to credit unions/private lenders impact may be close to 0%.
Private lending is growing which gives us a hint that people are avoiding B-20 but the ratio is unknown for me. Therefore I would not predict/expect impact of B-20 until I know cheating levels.
3) No comments, everything is solid. So far impact of steel and aluminium tariffs is minimal but we’ll see if it will be escalated further.
4) You are not using correct stats.
https://www.fin.gov.on.ca/en/economy/demographics/projections/
“The Greater Toronto Area (GTA) is projected to be the fastest growing region of the province, with its population increasing by 2.8 million, or 40.8 per cent, to reach
almost 9.7 million by 2041”
It comes down to 120k/year. This is an estimate and who knows how it will change in the future but as of now 110k/year for GTA sounds correct.
Household size in GTA is 2.7. Use StatCan Census 2016 official data.
To sum it up, we are not overbuilding much, at least for now but if population growth will slow down we may have this issue.
5) all solid
Recommendations are good as well except for this one:
“If you have a lot of equity in your home: Get a secured line of credit based on current valuation so you can buy additional homes when prices fall.”
Those HELOCs may and most likely will be trimmed down during the RE crash and it’s a bad advice in general. RE investing is not a panacea, there is 0% guarantee that it will outperform stocks/bonds or other investments after the crash. Landlord business was booming recently but you will be able to make much better decisions if you stop focusing on it. It is a bad advice to scoop as much properties as you can during the correction, consider all investment options and pick the best one is much better advice.
S&P is up 280% since 2008 crash and RE market just recovered losses so investment in US RE after 2008 crash was not the best investment decision.
Same goes for your Hamilton income properties. Market may crash and never recover, or recover in 20 years. Don’t be attached to RE only.
The only reason why market should crash today is because it significantly exceeded fundamentals, but if it crashes it can (and should) stay at that level for a very long time supported by fundamentals. That means your new investments in RE will give you cash flow part, but won’t give you appreciation bonus anymore.
One point that should be clarified on steel tariffs. Steel tariffs are not impacting Canada, except that US demand is dropping because of the higher US pries of finished goods, but they are walloping Americans. Whirlpool stock just dropped 10% because of these tariffs. Their American prices had to be increased by 20% due to the steel tariffs, and their European demand dropped by 12% as a result. It is cheaper to build a refrigerator in Asia, using non-tariff steel, and ship it to Europe than it is to build a refrigerator in America using tariff steel, and trying to sell it in Europe.
What financial pundits do not realize is that this is not a world-wide trade war, it is the world against America trade war. 80% of the world economy vs 20% of the world economy. The 80% of the rest of the world are still trading among themselves tariff free. Only American manufacturers are paying the steel tariff on imported steel. The rest of the world gets their steel at the same old same old lower price. It really doesn’t take a genius to realize who the rest of the world is going to buy their refrigerators from, and if you need it, a hint: it certainly is NOT going to be from America.
I would question the stats that are being used. Wondering how anyone can assume that increases in heloc balances are simply to pay for more personal consumption or to personally keep yourself financially afloat. As a former banker, I know that stats were not collected as to what purpose you used funds that you accessed from your heloc.
Also, as a retired employee who approved or declined both personal and commercial borrowing requests, we encouraged clients to obtain a heloc. Being a totally risk adverse environment, banks will almost always suggest heloc financing for business startups looking for operating lines of credit for working capital purposes. No stats were ever collected on those numbers.
Are HELOCs not issued against the full credit value given at time of signing. So the only available metric is the $value against an individuals name and not the amount owing?
Therefore, unless all the banks got together and devalged the amount of outstanding credit, there is no way to know if Person A owed $100,000 or $0 on their HELOC?