Canadians are exercising more caution before stepping into the real estate market. Bank of Canada (BoC) numbers show mortgage credit growth continued to drop in October. The pace of growth has only been this low for two months in the past 30 years, but is still on track to head even lower.
Canadians Owe Over $1.53 Trillion In Mortgage Debt
The balance of outstanding mortgage credit hit a record high in Canada. The balance reached $1.53 trillion in October, up 0.24% from the month before. That works out to an increase of $47.4 billion, or 3.2% higher than last year. The increase, while it seems like a lot, is actually very low growth for Canada.
Canadian Outstanding Mortgage Credit
The outstanding balance of Canadian mortgage credit.
Source: Bank of Canada, Better Dwelling.
The annualized pace of growth is one of the slowest in Canadian history. Over the past 30 years, the rate of growth has only fallen below 3.2% for just two months. Those months were April and May of 2001, over 17 years ago.
As mentioned previously, there’s a few key differences between today and 2001. In 2001, rates were 80% higher than today. That means Canadians could borrow ~25% less cash, making it harder to grow household debt. There was also a rate cut in 2001 which reversed the falling growth rate. Today, economists are expecting at least two more rate hikes. Each hike takes 6 to 12 months for the full extent to hit the market, so further growth declines are anticipated. The short-term numbers also point to further declines.
Canadian Mortgage Credit Growth To Fall Even Further
The low growth of Canadian mortgage credit is on pace to fall even further. The 3 month annualized pace of growth is just 1.9%, over 40% lower than the annual growth. Annualizing a short-term trend one way of estimating the direction of growth. Basically, it’s when a short-term measurement is projected as though it were the whole year. The 3 month period would have to rise and stay above the 12 month in order for us to see a rise in the number. We would need a massive spike over the next few months, heading into winter.
Canadian Outstanding Mortgage Credit Change
The 12 month percent change, and 3 month annualized change, of outstanding Canadian mortgage credit at large institutional lenders.
Source: Bank of Canada, Better Dwelling.
The drop in growth isn’t just concerning for lenders, but is important for liquidity. Lower credit growth often leads to tighter lending conditions, which reduces liquidity. The decreased liquidity leads to an increase in defaults, and higher borrowing rates. The higher rates reduce credit capacity, often forcing price growth lower or negative.
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This time is always different, until it isn’t.
I was told it always goes up. Are you saying this is an illogical statement, and you’re not sure why everyone believes it?
I still don’t understand why mortgage credit falling is a bad thing. People are paying off their mortgages, it’s natural for this number to fall. Especially whiles sales numbers are declining off of record years. This has nothing to do with prices.
It isn’t black and white. Good or bad, everything is about context. If this is a natural downturn that can be supported by fundamentals then we could be in ‘the new norm’; debt slaves of all. If this is market correction to remove inefficiencies then there could be significant downward pressure on demand which will result in prices softening. It isn’t the lack of the widget which causes the demand for the widget to drop and pricing, in many cases, to correct; it is access to the medium of purchase. Whether it is cash, credit or kittens once the taps are closed watch everyone freak out (and not in the fun way the song would suggest!). Tick tock. BD4L.
Because it means housing is leading the credit cycle and the cycle is over. Watch Ray Dalio’s YouTube video about the credit cycle and you’ll get how prices are simply a reflection of the size of the credit in the economy. Shrinking credit, falling prices.
Take a look at what is happening in Australia. one of the main factors in impacting the drop in home prices is slowed credit growth. Sydney is already seeing a 9% drop in home prices and the party is just getting started.
https://www.news.com.au/finance/economy/australian-economy/sydney-housing-downturn-to-eclipse-1989-recession/news-story/b2c328d3c1da8db297ea806b82b15f5e
don’t even need to look at Australia. Check out the price drops in the GVRD in real time at
http://www.myrealtycheck.ca
avg price drop is at $100k
This takes a look at realty price changes in the Lower Mainland and helps to point out general trends and stats. This is helpful as it shows the clear increase & decreases in prices across the Lower Mainland. People can see what the average changes are and can even search for more specific information.
Not surprising. Median growth following the peak was almost 30% higher than the previous trough, even though home price made a huge increase. The increase sustained growth needs to be followed by a period 30% lower than it normally would be, to balance growth. There was no other fundamental jump in the country to show a significant change in future metrics.
I laughed last week when at the dentist. The “Black Friday” teeth whitening sale was over, and signs went up for “12 and 24 month plans available for all your cosmetic dentistry needs.” Everywhere you look, there is a new buy-on-credit opportunity. $6000 for a few veneers, ummm-no, I’ll gonna pass.
Yea I did the same thing at the mall the other day,signs every where financing available for jewellery. What the f…k are people nuts.
‘The outstanding balance of Canadian mortgage credit.’ chart has made a few appearances over the last month, and every time I look at it I think the visual isn’t representing the data very well. In fact I tend to have reservations about the reporting simply because the chart shows a steep incline… there appears to be no abatement to the credit growth when looking at the chart.
This likely stems from having the numbers go back to 1971, it washes out the current shift in the representation by having such a low starting point. I think this chart needs to go back to maybe 88 at most to start showing at the actual calculations describe.
Which brings me to a suggestion to bring Better Dwelling to the next level… It would be great to have simple axis-input selection so we can manipulate the data on the fly. It would bring great value to the writing if I could set each axis with a ‘start’ and ‘stop’ value.
Their institutional subscription has “beta” charts, so I think they’re changing how the charts display for more flexibility soon.
The Canadian 2 year to 10 year Bond spread is 9 basis pts. The yield curve is flat. Recession is probable by Q4, 2019. Good news is Canadian Mortgage Interest Rates will drop to near 1% by 2021 and Home Prices will rise again. In certain areas of Canada Residential Home Prices will double by 2025. Anyone Agree?
I agree with the recession sentiment and with home prices eventually rising again, but I think this will be a drawn out decline in home prices. I don’t expect house prices to have doubled by 2025 as they might not even have bottomed by then. Again, who knows…
Nope, check how much US cut interest rates in 2008 and what happened to RE prices. They still have about 9% underwater mortgages even today when RE market is fully recovered there.
https://www.bloomberg.com/news/articles/2018-05-29/millions-of-u-s-homeowners-still-under-water-on-mortgages
Once downward spiral in prices started it’s extremely difficult to stop it and 1.75% rate cut BoC can offer won’t do it for sure.
If interest is at 1% in 2021 the canadian dollar will be below 0.50$ US. I think rates will rise along the US rates, with a few months delay. People that borrowed money they could never pay back will get what’s coming to them.
Every Canadian will be a millionaire!
But a Big Mac will cost $250.
No rush – I can wait for that.
According to the country’s largest homebuilder, Canada has achieved a soft landing in real estate. That’s pretty awesome because it’s never been done before. Yeah Canada! We’re # 1. It’s not all good news though. Those 20 to 30 percent annual price gains, are probably a thing of the past, at least for another couple of years. Price appreciation will likely continue to grow at a more sustainable 10 to 15 percent annual pace, until about 2021, when Generation Z reaches prime home buying age.
Sorry for the delay chris, after I spit coffee all over my computer I had to go buy another one and the guy at best buy starting trying to upsell me on monster cables and I’m like “Bro, i’m all HDMIed out, like 50 ft gold tip to the max” and he’s all like “Gold tip, yall need titanium” and then I’m like “Dude, there is this guy scott crisswell or chris scotwell talking mad shit on BD, I gosta get back there soon” and he’s like “oooh, that chris scottwell? You should go…oh wait, you sure you don’t need those cables?”…so what were you on about scott or chris or whatever you’re calling yourself? 15% YoY gains for the next 3 years. Seems to make sense. If you’re not a paper millionaire living in a shit hole in the suburbs with 40% LTV in a HELOC praying you die in your sleep, you really haven’t really lived. Tick tock. BD4L.
I’m pretty sure he was using a literary tool called ‘sarcasm’. He’s right though, 20-30% increases are a thing of the past…unless you paid it, then it’s all too current.
Blue, this is future blue…you’re a douche. Thanks Rob, past blue is slowing losing his understanding of sarcasm. Was at a dinner party with a real piece of work over the weekend so my tolerance for BS is in the negative. It’s snowing!!!!! Tick tock. BD4L.
Ghosts of various Blues. I think everyone is exhausted with 2018. In the words of Charles Dickens via Ebenezer Scrooge ‘god bless us, everyone’ – we may need it. Lets hope 2019 doesn’t look Cormac McCarthys’ The Road.
It’s very hard to forcast the future accurately. But all the comments are fun to read!
You can’t forecast the future, but you can mitigate risk. That’s what separates the rich from the people that think they’re rich because they own a 400 sqft.
No doubt the new stress test that came into effect January 1, 2018, has contributed to creating this change. It is exactly what the Feds wanted it to do. Make qualifying for a mortgage tougher. If those with an existing mortgage are thinking of paying some down to lower their overall debt, then it is a good thing – other than for the fact that consumers are no longer stimulating the Canadian economy as in the past.
Contributed, but didn’t cause it. They slapped that on almost a year after the declines began, and it was near historic lows before they came into effect. Government tends to slap a restriction on the collapse of a trend, and pretend they did it, when in reality the issue was resolved through market forces. They did the same thing with foreign buyers. Slapped a measure after China already cut off capital exports, and claimed victory. 😂
Ding ding ding…someone is following the bouncing ball. Blue likey. Tick tock. BD4L.
Oh! What A Tangled Web We Weave When First We Practice To Deceive”
The Bank’s and BOC are quietly positioning themselves to prevent a full blown catastrophe of economic proportions..
Who are we kidding here…It’s the end of the RE cycle and Business cycle in general and and its almost time for the blow off.
how ever long its going to take to reach the bottom, the longer it takes the better it is for BOC and bankers; but the reality is its happening and for some it might be wise to get out with a little than to stay and get nothing..or you will just have to hang on for the ride and that is what most are going to have to do anyway’s because they don’t have the time to detach themselves from it..it takes months to prepare and months to sell. Even months to mentally decide this is what I need and must do. Good luck I got out 2 months ago and have perched myself for a while until I see where this is going..
Sold my condo (October) renting now. Feeling horrible… zero mortgage or LOC – guess I was part of that paydown.
Not exactly, the person that bought from you probably now has a higher total mortgage than you did. Good move though.
Hope you have a great landlord. Folks at work are having nervous breakdowns due to Toronto renting mayhem….sudden unexpected renovictions…condo buyers trampling through their home as units are listed for sale for months at a time…absentee landlords when stuff breaks…crazy bidding wars on rental units….apartment listing/deposit fraud…Landlord and Tenant Board hearings…AirBnB neighbours. Renting in Toronto in 2018 sounds way too dystopian to me. I’m not drinking the Kool-aid.
Seems like less sales happening but prices are holding relatively steady in Toronto (416) though areas where prices have gone up way too much during the 2015-2017 period are seeing some correction. Real question is can home owners/investors hold on to their properties when the recession/downturn comes. Areas where there are many speculators and over leveraged home owners will definitely see prices fall but areas where most homes are bought by people with the purpose to live in for a long time will not be so affected. In general, the former is more prevalent in the 905 region of Toronto and the latter describes the 416 region.
There are always opportunities around…you just got to be the 1% and find it!
P.S. not saying fundamentals are important but they are not all that runs the economy…otherwise, professors will be the richest people around! :p
Why do you feel there is less leverage and speculation in Toronto proper? My gut tells me that 416’s higher price point and commoditized-condo market make it the epitome of leverage and speculation.
While I do believe that land in 416 has more inherent value than 905, neither will be spared by the credit cycle. This will affect all homeowners whether they choose to live there for a long time or not.
You clearly haven’t seen that Urbanation’s report about 48% of all new GTA condo buyers to be investors.
https://www.urbanation.ca/sites/default/files/Urbanation-CIBC%20Condo%20Investor%20Report.pdf
What makes it even worse is that people actually bought those condos sometime around 2013.
Share of investors who purchased condos in 2016-2017 was off the chart. There is no official data but it’s very easy to compare to 2013 sales.
416 is the epicentre of this condo investment activity.
My bad…I was thinking of houses not condos!
2/5 Yield Curve in the US just inverted. 2/10 is close to inversion, lowest since 2007. With low GDP, recession may be as early as 4-6 months….
Hey guys,
Need some advice….just purchased a pre construction home in Brampton, this is my first property ever, so I am just a bit nervous. The closing was for November 2019 but I pushed it to March 2020. Did I just lock into a price that is dramatically higher than what I could expect in 2020?
Thanks,
NB
Do your research and I think you can answer your own question…but…probably.
As for “drinking the kool-aid” That’s been my response for a while now as well, except for the opposite reason’s SUMSKILLS is refering to; when ever anyone ask’s for my opinion…such as the last guy…who just took a big swig of it.
I’m not saying renting is the answer either, I have made a lot of dough in RE. I just see a turning of the tide going on and I want to be on some high ground for now. I will get back in it’s just a matter of when will I do it.
I don’t understand all the hubbub about house prices.
House prices will always trend up forever. So will rent. Buy when you can reasonably afford as soon as you can. Live in it, pay it off in tomorrow’s dollars, and get on with it.