Canadians are going all-in on housing, as it’s increasingly seen as a low-risk asset. As debt grows faster than the economy, the ratio of mortgage debt to gross domestic product (GDP) has been soaring. Canada has created so much moral hazard, home prices no longer fall during a recession. Instead, households are leveraging up and devoting even more capital to housing debt. This trend is accelerating as Canadians see little use for money other than housing.
Canadian Mortgage Debt Has Grown Almost Twice As Fast As GDP
Canadian mortgage debt barely misses a beat, even when the economy slows. Over the past 10 years, outstanding residential mortgage credit has increased by 71.5%. In contrast, nominal GDP increased a modest 39.3% — strong growth but dwarfed by mortgage debt growth. Mortgage debt has grown at nearly twice the rate of economic output. This puts households at a much greater risk of correction — or at least paying for a bailout.
Canadian Mortgage Debt To GDP Is Now 71%
Mortgage debt has grown faster than GDP consistently, reaching nearly three-quarters of GDP. Outstanding residential debt reached 71.0% of GDP in Q2 2021, down from the peak of 79.5% a year before. That minor skew was due to lockdowns suppressing trade temporarily. Now that things have returned to normal(ish), we have a better idea of GDP. Even with the pullback, though, it’s still 5 points higher than it was in Q4 2019, before the recession.
Canadian Mortgage Debt To GDP
The ratio of seasonally adjusted mortgage debt to gross domestic product (GDP) in Canada.
Source: Statistics Canada; Bank of Canada; Better Dwelling.
Mortgage Debt Is Growing Much Faster Than Canada’s Economy
Zooming out, we can see this trend is a long-term one. In 1990, the ratio of mortgage debt to GDP was just 34.0% in Canada. It took 13 years for the ratio of mortgage credit to GDP to rise 6 points, breaking above the 40% ratio. In contrast, the past 13 years have seen the ratio increase a whopping 22.7 points. Mortgage debt isn’t just growing faster — growth has been accelerating.
Canada’s economy is more dependent on residential real estate and turning into a housing Ponzi. Housing investment has outgrown business investment for the first time since 1961. Households are also dropping entrepreneurship, while more people become “housing investors.” Canada is now at the point where the banks that profit from mortgage debt are warning this is a reckless scenario.