Canada

Canadian Mortgage Growth Falls To The Lowest Rate In 2 Years

Canadian Mortgage Growth Falls To The Lowest Rate In 2 Years

Canada’s booming real estate market led to explosive growth in mortgages, but that may be ending. Numbers from the Bank of Canada (BoC) show growth of household mortgage debt is starting to slow. The decline in growth may not be a red flag for most investors, but that’s because they aren’t looking at the whole picture. When you couple this with some of the other market conditions, we get an indicator that smart investors are taking note of.

Here’s Why You Should Care About Mortgage Growth Falling

Smart people like Richard Vague claim rapid increases in debt, lead to asset price inflation. Vague claims “prices have increased well above the trend for those asset categories where the lending has been concentrated.” Simple words, but a complicated sentence. He’s saying that a rapid increase of prices beyond normal, is usually linked to an area of strong credit growth. Once that credit growth starts to slow, it tends to trigger a correction. After all, if credit was linked to the growth of prices, prices need to come down to accommodate the change.

This is why you should be monitoring credit, and be on the lookout for mortgage debt deceleration. This will provide you with another indicator that may tell you when the market will experience softer, or negative price growth. In Canada, we rarely see negative mortgage growth. This is largely due to the perpetual importing of capital. Instead, what you want to be on the lookout for, is whether the trend slowing down.

Canadian Mortgage Debt Rises Above $1.51 Trillion

Canadian mortgage credit growth reached another all time high. The BoC reported $1.518 trillion worth of outstanding mortgage credit at the end of December. That’s an increase of 0.45% from the month before. It’s also a 5.54% increase compared to the year before. While the total level of debt has reached an all time high, the rate of growth has actually dropped to the lowest level since December 2014. Yes, that’s mortgage credit growth deceleration… that thing you should be looking out for.

Source: Bank of Canada. Better Dwelling.

The Mortgage Credit Trend May Be Slowing

BoC numbers show the trend may be starting to slow. The one month annualized rate of growth fell to 4.6%, a 17% decline compared to the actual annual trend. The three month trend dropped to 5.2%, a 6% decline. The one month trend is severe, but not all that important. The three month decline however, is the one you’re going to want to take note of. It’s not a huge drop, but when you combine that with a declining 12 month trend, you’re looking at the beginning of a period of deleveraging on the horizon.

Source: Bank of Canada, Better Dwelling.

It’s too early to tell if this is it for growth, but there are some factors that will apply even more downward pressure. Rising interest rates, and mortgage stress testing are the biggest ones to look out for. Interest rates reduce borrowing power, by making mortgages more expensive to carry. New B-20 regulations from the Office of the Superintendent of Financial Institutions (OSFI) will also reduce borrowing on top of that. If we combine these factors, we’re looking at a sizable impact, especially when you consider how many homebuyers max out the amount they can borrow for a home. So, mortgage credit is decelerating, interest rates are rising, and the government wants you to borrow almost 20% less… it feels like we’re past peak mortgage growth.

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38 Comments

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  • Miao 10 months ago

    Mortgage credit declines are a big issue people aren’t talking about. Combine less credit being issued, with more inventory, and less sales, and lower prices are the only resulting option.

  • Maher W. 10 months ago

    OSFI should not have penalized people with a stress test WHILE rates are rising. They should have done this when rates were on the way down, not up. If the market crashes, it’s 100% their fault. Another government overstepping their boundaries.

    • bluetheimpala 10 months ago

      Hello honey bun: OFSI and BoC are completely different. But you know that…please keep the partisan garbage at the door.

      We need to be saved like a dog that eats too much, pukes and then eats the puke, poops that out and then well…yum. Human’s are stupid by design and we like poop too.

      Blame who you want but left to our own devices we end up like Thunder Dome…on a side, I have no moral problem eating human meat so I think I’ll do ok.

      • Justin Thyme 10 months ago

        Blue, you have such a way with words. Impressive. Now I can’t stop seeing it.

    • Alistair McLaughlin 10 months ago

      You’re right that they should have done it years ago. But better late than never. Yes, it will be pro-cyclical – governments are notorious for bringing in policies at exactly the wrong time. But it still needs to be done. Remember, OFSI isn’t concerned about house prices at all. Their only mandate is to regulate financial institutions that fall under federal jurisdiction. That’s it. Any decision they make will be based on that mandate. Housing market impact will not be a consideration.

      If they decided not to act out of fear of what it would do to the housing market, they’d be abandoning their core mandate – and their only reason for existing.

    • Asterix 10 months ago

      OSFI is doing its job (a bit late), it’s not penalizing anyone, it’s trying to protect Banks, that’s its job.

      Canadians are financially illeterate, B20 + rising rates is perfect! Only thing that can slow down a tribe of morons buying overpriced and cheaply made homes.

  • Trader Jim 10 months ago

    Vague and Prof. Steve Keen are the two people that predicted the US Great Recession. People keep saying an event like that is unpredictable, but these two predicted it using just those two measures.

    Glad to see that they’re getting more mainstream appeal. They’re going to turn modern economics on its head in just a few years.

    • C 10 months ago

      Which two measures? Credit growth deceleration and…..
      I’m not being rude, I really dont know the answer.

      • Justin Thyme 10 months ago

        Credit growth and asset price change. The growth or contraction of the credit category that buys the asset category. The more available money there is to buy the asset, the higher the price goes. There is no such thing as unlimited supply to meet unlimited demand.

        Except in political proselyting, that is.

    • bluetheimpala 10 months ago

      Jim, it boggles the mind that so many people think economics/stocks/housing/finance is like a natural occurrence that can’t be tracked, analyzed and predicted, to a certain extent. That’s the myth that helps perpetuate these boom and bust cycles where 99% of the population shoulders the wealth creation for the 1%. While no one can truly ‘time the market’ regular people can learn enough about the markers to make informed decisions.
      Please keep up the great comments and helping us understand these issues.

      • Justin Thyme 10 months ago

        You might be interested in researching ‘Granger causality’. Seemingly unrelated and independent variables used to predict target variables. The trick is to know which variables to track. it is one huge optimization function, with dozens of variables all playing a part. Unless you track ALL of them, you don’t get the entire picture. Quantum computing just might be able to do this.

        • Professor of real estate 10 months ago

          All this mumbo jumbo about analytics and tracking data to predict this and that. Whatever. It is quite simple. You need to understand basic psychology of the average person. Most people are sheep that can be manipulated by FOMO and fake news articles run by a syndicate of banks, TREB and real estate agents and developers. What’s the problem? we need average folks to make counterproductive financial decisions in order for others to make it in the 1%. Everyone wants to be in the top 1% without doing any real work or aquire any real knowledge. Bunch of losers. Most folks here talk a lot. well, I do a lot. Making $$$ in real estate not whining about a crash. You got to position yourself that you make money in any scenario (upswing or crash).

  • Alex 10 months ago

    After government introduced 15% foreign tax, the market paused and number of sales significantly dropped. The natural outcome on that is less new mortgages, so there is nothing surprising in these stats. However this fact by itself does not necessarily suggest that prices will go up or down from now on. Currently detach market is down big time from the peak, while condos are at peak (april 2017) level or in some buildings even little higher. But who knows where it goes from now.

    • MH 10 months ago

      Ponzy schemes live and die by inflows or lack thereof. The inflows must be ever increasing to feed it. If you see things like this you know it’s over.

      • Alex 10 months ago

        Well, unfortunately inflows are not over yet. Preconstruction condos are still being scooped from Hong Kong and Singapore

  • Grizzly Gus 10 months ago

    Don’t forget about the debt squeeze in China. Their big corporate overseas purchasers have reversed course and are now unloading assets. Search HNA, or Wanda

    http://www.businesstimes.com.sg/banking-finance/chinas-hna-reverses-buying-binge-with-us4b-selling-spree

    Foreshadow of what’s to come with retail / individual investors? Too soon to say. Guess it will depend on how much of it was purchased on debt, and how serious China continues to deleverage.
    Articles about Chinese “ghost collateral” and Canadian banks exposure lead me to believe it is not going to be pretty.
    http://vancouversun.com/news/local-news/vancouver-real-estate-in-the-red

    • Justin Thyme 10 months ago

      The world is no longer American-centric. For 70 years, one only had to look at what was happening in America to understand world economies. Now, the world economy has become China-centric. Without understanding that China has a completely different attitude and approach (collective socialism vs individualistic capitalism) one will just be completely baffled by what is happening. America is greedy. One trade negotiator once said ‘China wants what is theirs, and you can have what is yours. America wants what is theirs, and they also want what is yours.’

    • Justin Thyme 10 months ago

      But be careful. The article you linked to is from an American-centric publication. The see the market from an American perspective. These sales are in American dollars, not yuan. China has just acquired (laundered? leveraged?) yuan for greenbacks. The yuan stays in China, the greenbacks can be used anywhere in the world.

      • Grizzly Gus 10 months ago

        Yes but you have groups being forced to liquidate US priced assets to settle local Yuan obligations (potentially some foreign ones as well). China has some pretty big debt bubbles of their own. I am just worried that a local financial squeeze may cause some of those “investors” to liquidate assets here to prevent default at home………. I especially do not see them holding on if all of a sudden they are watching their Canadian investment fall in price.

        • Justin Thyme 10 months ago

          Do you REALLY believe that ‘being forced to liquidate assets’ nonsense? If you do, then you just do not understand China. That is pure American propaganda, aka ‘we know nothing’ about what is happening, The Chinese make more on the exchange rate than on any rise or fall of asset prices.

          There is absolutely zero connection between yuan holdings and greenback holdings. It is impossible to pay back yuan debt with greenbacks, and they sure aren’t selling these holdings for yuan.

          China has absolutely no debt problems. Americans just wish that were so. The Chinese government can make debt disappear overnight if it serves their purpose.

        • bluetheimpala 10 months ago

          I’m more worried of the Party putting a call on the oligarchs. It operates like a big state sponsored enterprise and Xi is having problems. His shift to consumerism is failing and a lot of what has happened over the last 10 years is just capital flight. The debt bubble is a lot bigger of an issue and he has played the infrastructure card. The game is over and he is getting hella pissed..all he has to do is ask. That’s it. Bring 90% of your capital back or else. Saudi Arabia just purged to bring back funds. Russia does it ALL the time; look at Oleg D. If China can’t figure their shit out over the next 12 months I swear they will just suck it all back…the experiment failed. Then again, I’ve read that unless you’re on the ground in China it is nearly impossible to know exactly what is going on.

          • Justin Thyme 10 months ago

            Three is trouble on the horizon. The uprising in 1989 was not so much about students, but about factions within the Chinese hierarchy fighting for control. Sort of like what is happening in America today – the hard-line were opposed to the newer liberal direction the Party Leadership reformers were taking China in, and made their move. The hard-liners won. But make no mistake, no matter what the Western propaganda says, this was an internal conflict within the party leadership.

            There can be NO capital flight from China. This is a fallacy. Unlike the greenback, the yuan is worthless outside of China, so taking it out of the country does not make sense. The issue is NOT the flight of Chines capital, it is the flight of foreign reserves. But these foreign reserves are useless in China. They are useless in building Chinese capacity.

            But the real fight being waged by party politics in China is the pressure of the Westernized capitalists (your oligarchs) who want to continue the gravy train of foreign capital, and the Chinese socialists (Xi) who demand that this capital be used for the benefit of the Chinese people.

            Xi is consolidating his military and judicial power base to win this battle before it leads to another uprising, and keep a lid on it. He intends for more level heads to prevail, by removing the heads of the capitalists before they can muster popular support.

            His task is to keep the renminbi in China, and get the Westernized capitalists to leave China alone, and LEAVE the country. He WANTS them to leave. That’s why they are getting greenback liquidity from their foreign holdings, so they can use that when they leave China. They can’t get liquidity from the foreign exchange holdings of China any more, they can’t exchange renminbi for greenbacks. So they have to go out of the country to get it. Their ‘wealth’ is no longer Chinese wealth, it is Western wealth. Xi does not WANT greenbacks in the Chinese economy. That is what is so hard to understand by those in the West, who worship the greenback as the be-all and the end-all, the source of all wealth,

            Forcing them out of China is preferred to the messy business of chopping off their heads. Once he gets the greed out of China, and into the West, it will pave the way for consumerism. Production will no longer be for profit, but for the benefit of the people. Marx called it perfectly – use capitalism to build plant, then kick the capitalists out. China now has the plant, they have the ability to produce for their own people, now they have to get rid of the capitalists who want to use it for profit, to fill the shelves of Walmart at huge markups and great cost to the Chinese.

            Xi is very clearly signalling that such attitudes are no longer welcome in China. It is good ridden to them. Don’t slam the door behind them as they leave. Just close the door. No re-entry allowed. The more that leave, the less social pressure on China. Let the West deal with their greed. Less chance of another 1989.

            But they are NOT taking renminbi wealth with them out of China. What wealth they have outside of the country is now it, The state will reposes whatever Chinese plant they leave behind. No more profit from Chinese production to fuel their greed.

            But really, my real fear is that greenback wealth will become useless, and renminbi wealth will be the only currency of value. Already, Middle East oil is selling in Renminbi, not greenbacks, and Africa is turning to the renminbi. It is China’s intent to make the greenback worthless in international trade, and since the Chinese totally control the greenback-renminbi exchange, they call the shots. It’s either the renminbi, or the greenback.

            And it can not be understated the influence China has over Asia. The wall falling between North and South Korea, at China’s hand, is the beginning of the end of American influence. These Olympics will be remembered in history as the turning point. South Korea will look more to China and the renminbi for its health and safety, than to America and the greenback. China brought peace and stability to the border, America only brought threats of war and annihilation. The future for South Korea is China, not America. Once South Korea adopts the renminbi, it is game over for the greenback.

            And America is just driving the rest of the world into the Chinese camp.

            The world has become a very different place in the last ten years.

  • Al Daimee 10 months ago

    The real estate market has certainly shrunk from its monstrous proportions of 2017, but not down and out like most would believe. Multiple offers are still happening and there is a lack of quality supply. People just aren’t willing to buy mediocre properties like they were last year, which partially explains the growing amount of inventory relative to a year ago. Some of these sellers are also not realistic in their pricing and will sit on the market longer, relist a few times and then have a choice to drop price or rent out the property depending on their situation.

    Toronto is becoming a renter’s city and it will fall to the investment community to keep up the rental stock as the city becomes more dense. The City of Toronto has no money or budget for new affordable housing and are looking to developers to add to that pool. Who is paying for that? Investors and end users, as developers will pass that cost on to purchasers.

    New condo launches are being bought up quickly (surprisingly, nobody is remarking on this in the media) and most investors are not concerned about any short-term corrections as they are buying for long-term rental. Everyone needs a place to live and until Toronto’s population growth stalls out or more land is released (20K acres of developable land was recently removed to add to the greenbelt), there won’t be any major shocks to the housing market here unless the government does some new drastic measure. Interest rate increases are moving cautiously by the Boc and will eventually level out mortgages closer to the new historical average of around 7%. This will affect domestic buying, hence the expected shift to rentals and the reason why the international community sees Toronto as a safe Real estate investment for the long-term.

    Will price growth ease? I certainly think so and hope so. This time last year was out of control, but prices are already showing a rebound toward those previous highs for desirable areas of the city. There is way too little data to remark on final 2018 numbers, but the effect of OFSI will push the condo market faster than the house market. Once the gap shrinks enough, the freehold market will rebound as condo owners move equity to freehold houses.

    • bluetheimpala 10 months ago

      Money is tightening very quickly. Smart money is leaving town. Exuberance has plummeted. Realities are setting in. China troubles. Data other than the ‘Al Sinclair on BNN white wash’ is getting out to the masses. Inventory climbing. Prices coming down. The fuel to the fire, credit, is disappearing.
      No more finite land arguments. No more immigration. No more investors are going to buy over valued assets and keep the money train going.

      No one here can say for sure what is going to happen but here is an analogy: there is a cat in a box. It’s been there for 2 weeks. Until you open the box the cat is neither alive nor dead because the state is unknown….ah no, this ain’t philosophy/theoretical…he cat is dead. Please go open the box.

      • Justin Thyme 10 months ago

        The cat isn’t even in the box. The box is empty. Well, maybe it left SOMETHING behind.

        Middle east and Russian oil is now being priced and sold in yuan. That one shocked the pants off me. I didn’t expect it yet, but Trumpism is forcing their hand. China is undercutting the greenback, perhaps sooner than they had planned.

        We won’t know what the result will be until China shows its hand, but it is certain that China IS making its move, and calling the shots. We just don’t know what the target is yet.

  • Justin Thyme 10 months ago

    Baby boon, bust, echo, bust, echo, bust. Never has a graph shown that as much as the mortgage growth rate from 1970 (boomers buying houses) through the 80’s (boomer demand satisfied) through late 80’s early 90’s (echo) and re-echo (early 2000’s) as millennials started their families later. Seems to me the echo-bust cycle is flattening.

    • Alistair McLaughlin 10 months ago

      Yep. And the 25-34 year old age group – key for new household formation – is no longer growing, and will begin to shrink by 2020 (if it hasn’t started to shrink already). And that already takes into account the increase in immigration rates announced earlier this year. The last time that demographic shrunk (1990 – 2000) so did real house prices.

  • Tracy 10 months ago

    I’m a nobody ….I owned my home five years ago. I had to sell before the bank took it. I was put on disability from my job. Two months later my boyfriend lost his job (from the same work). From there everything has been downhill. I now rent. Which in my opinion is a waste of money unless it’s an investment. I’ve now been on longterm disability. I can barely leave the house because anxiety depression ect. Disability is a life sentence where you have no control. I get 1644.00 a month. My rent is 1400.00 a month. It’s a hard life to live when there’s no where no way of qualifying for a loan. A mortgage. I’m 44 years old. I want to have a life again. My house..I rent..litterally is crumbling. The foundation has a hole big enough to see the basement joice. The roof leaks. I’ve had a cough I can’t get rid of. I’d guarantee there’s mold….I have no choice but to live here. Landlord …just doesn’t no…he says. Does nothing. I’d give anything to own my home again. A yard..big enough to have a garden. Flower beds. It’s hard to have money for any of this things…let alone put money in someone else’s home.
    I’d love for someone to say yes..i can own again. I’d love for anything positive. Five years of crap luck. One thing over and over..it’s VERY hard to have a positive attitude when I’ve had nothing but bad. My jeep also died so any assets are nil…
    I just want MY own home…

    • bluetheimpala 10 months ago

      Everybody is somebody. Chin up there.
      If you do not have any ties to the city you should consider moving to a lower cost city or even province if possible. You can live in Regina for a 6 pack of 50; I believe that is legal tender out West.

      If you retained any equity in your house, with this stock downturn I would put it all with a money manager for 5 years once the dust settles if you don’t already; the returns will be dope

      Make a complaint against your landlord and sue them for rent (there are enough lawyers who would take case for a backend payment vs up front); as a person with disabilities the courts will be sympathetic to your cause and ham it up; heck, wear a neck brace just cuz.

      Seriously though…I am glad someone like you is reading BD and please share. We don’t need to live in the darkness anymore.

    • Justin Thyme 10 months ago

      Renting is not the end of the world, and you are not yet half way through your lifespan. Minimum wage now pays $2,600 in Ontario times two brings a couple into the range of a starter home in a modest community. But don’t expect middle class suburbia in a major metropolitan area. Stay flexible.

    • Investor 10 months ago

      It shall be well with you Tracy. Just summon up the strength to remain positive. It’s just a phase that will pass.

      • Tracy 10 months ago

        Thankyou. I find it hard to get the courage when for five years( no lie) there’s been nothing but bad. My anxiety kicks in so easily anymore

  • Dman 10 months ago

    If you still have a horse in the Canadian real estate race…you have my sympathies.

  • Paul Sharp 9 months ago

    Increasing mortgage interest rates reduces the power of the buyer to borrow which leads to decrease in mortgage growth rate. And mortgage stress on the borrower is another reason of fall in mortgage growth.

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