Canadian Mortgage Credit Nears $2 Trillion, Growth Is Still Astronomical But Slowing

Canadian mortgage credit has seen a drag from higher interest rates but old habits are hard to break. April hit a new high for residential mortgage debt, according to Bank of Canada (BoC) data. Higher interest rates, only two months in, helped to slow the rate of growth but it’s still very high. Canadian mortgage debt still grew at a level usually only seen preceding recession.

Canadian Households Owe Nearly $2 Trillion In Mortgage Debt

Canadian mortgage debt reached a new record high and it is still climbing at an unusually fast rate. The outstanding balance of mortgage credit was $1.99 trillion in April, up 0.7% ($13.4 billion) from a month before. It came in 10.3% ($185.5 billion) higher than the same month last year. If Canada’s mortgage debt was a country’s GDP, it would be the 15th largest economy in the world.

Mortgages See Monthly Growth Fall But Remains Elevated

Growth is running at an unusually fast rate from a historical context. The 0.7% growth in April is lower than the peak monthly we’ve seen over the past year. Fewer than a third of months since 1990 have printed a larger number. The top third is very impressive growth while home sales and prices fall.

It’s important to remember interest rates are rising but still historically low. Interest rates are still stimulating credit growth until it reaches the neutral point. In April, the BoC overnight rate was estimated to be halfway to the neutral policy rate, at most. It may be hard to believe from the whining, but credit stimulus is still here. 

Canadian Mortgage Growth Is Still Amongst The Highest In 32 Years

Annual growth has come down from the peak this cycle in February but it’s still substantial for Canada. April’s 10.3% 12-month increase has fallen by 0.7 points from the February peak. However, annual growth is in the 9th percentile since 1990. Prior to this cycle, the only time this level was hit in the past 3 decades was the run up to the Global Financial Crisis. 

Canadian mortgage credit reached astronomical levels but it’s still unclear what it means. Despite mortgage debt accelerating until February, originations fell in the previous quarter. Fewer, but larger mortgage borrowers were primary drivers, possibly a sign of exuberance. 

When people hear debt, they almost always conjure images of poor people as well. However, around 70% of consumer debt is held by the top 40% of households by wealth. It’s a lot of debt but the consumers holding it have substantial capital cushions. They can withstand shock without it becoming disorderly, in theory. It might not be fun, but losing extra cash is very different from losing your only cash and starving.  

Even without higher rates, the level of debt would be a drag on the economy. Keep in mind that debt grows the economy at the expense of diverting future capital. The more that’s borrowed today, the more artificial growth is seen at the expense of future economic growth. This is especially true for non-productive assets like housing. Borrowing money for a granite countertop is different from borrowing money to automate a factory. Who would have thought? 

And boy-o-boy did Canadians borrow a lot of non-productive debt over just the past year. Over the past year, Canadian mortgage debt grew the equivalent size of the GDP of Macau… Sudan, El Salvador, Honduras, Papua New Guinea, and Senegal — combined.