Canada

Canadian Mortgage Growth Falls To The Slowest Pace Since 2001

Canadian Mortgage Growth Falls To The Slowest Pace Since 2001

Canadians are getting cold on mortgage borrowing in 2018. Bank of Canada (BoC) numbers show the balance of outstanding mortgages hit a new high. Despite the high, don’t expect the same kind of growth we saw last year. The new high comes with a rapid taper on the growth rate, as higher interest rates and mandatory stress testing deter borrowing.

Canadians Owe More Than $1.526 Trillion In Balances

Residential mortgage credit made a small monthly increase, but still climbed in March. The total balance of outstanding mortgage credit is now $1.526 trillion, a 0.13% increase compared to the month before. This is an increase of 5.34% compared to the same month last year. Yes, Canadians racked up a whopping $76.4 billion more in outstanding credit, over the past 12 months. That’s not the most important point. This trend is decelerating, potentially marking the end of the credit expansion cycle. That’s healthy, but usually rough for the economy.

Source: Bank of Canada, Statistics Canada, Better Dwelling.

Annualizing Trends Explained

One common way of determining where a trend is heading is annualizing a shorter period. It sounds complicated, but it’s just using a measurement of a shorter period, and projecting what that number would be if the whole year was like that. I know, you watched a YouTube video from Cletus’ House of Mortgages or whatever, and he said you can predict where the mortgage market is going. However, this is one method fancy organizations like the BoC use to determine these things, so humor us for a few minutes.

The 3-Month Trend Is The Worst It’s Been Since 2001

Residential mortgage growth is grinding to a halt. According to the BoC, the 3 month annualized rate of growth has fallen to 3.6%, a 40% decline compared to last year. In order to find a period this slow, you would have to go all the way back to July 2001. If you’re wondering why this matters, people use mortgages to buy homes. Dollar volume is a major influencer on the direction of the price of those homes.

Source: Bank of Canada, Statistics Canada, Better Dwelling.

Slowing growth for residential mortgages may surprise some, but it shouldn’t. Stress testing of uninsured mortgages rolled out in January, are designed to do this. The most recent 3 month annualized data point is the first that excludes most pre-stressed mortgages. Regulators don’t expect the full impact to be seen until 3 to 6 months after rollout. So don’t be surprised if this number heads lower.

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32 Comments

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  • Ian 10 months ago

    The chart on growth is very interesting. Low interest rates make the growth rate look “low” relative to previous period of high price growth, but it’s clearly not.

    • Trader Jim 10 months ago

      Consistent lowering of interest rates makes it look nice and smooth. It’s a bank’s objective to ensure you never actually pay off your mortgage, it’s how they make money. Why convince you to get off the property ladder after 25 years, when you can convince someone to ride it through retirement?

  • Sammy 10 months ago

    Distribution of mortgage growth is the most important. If it’s all in Toronto, which it probably is, it doesn’t matter if it slows. A slowdown in Calgary or Vancouver doesn’t impact Toronto.

    • Sam 10 months ago

      So “all” the mortgage is accumulated in Toronto, but “all” the slowdown is coming from Calgary? Seems legit!

    • Cash 10 months ago

      Sammy. Sales in GTA down 20-35% yoy for each month in Q1 and GTA is Canada’s largest housing market. Pretty easy to infer that mortgage origination shrank significantly in the GTA in Q1.

  • Alistair McLaughlin 10 months ago

    Any doubts about the potential effects of B20 can now be put to rest. It’s starting to bite.

    • Grizzly Gus 10 months ago

      Yup and doesn’t look like “brampton loans” will be able to save the day

      • @xelan_gta 9 months ago

        Like I said previously B-20 is not transferred to prices yet, but it definitely will to some extent. While some honest buyers will give up their dream because of B-20 I expect big chunk of buyers to cheat B-20 by going to Credit Unions/Alt lenders and providing fake income statements.

        The key question would be the percentage of buyers who decide to cheat B-20.

        As for mortgage originations, we got +0.75% rate increase lately so about 6% drop in originations should be caused only by that. Anything above that number may be considered as a result of B-20, change in buyers’ psychology and other factors.

  • Alistair McLaughlin 10 months ago

    The economy is still reasonably strong, both in Canada and globally. Interest rates are still very low. We are at “peak Millennial”, meaning that generation is at its peak home-buying activity right now. Yet mortgage growth is right where it was in November 2008 when the world was falling apart. I’d call that a significant development.

  • xelan 10 months ago

    Quite interesting speech from Stephen Poloz (BoC governor)
    https://www.bankofcanada.ca/2018/05/canada-economy-household-debt-how-big-the-problem/

    Here was the most interesting part for me:
    “In our Monetary Policy Report (MPR) last month, we published our latest estimate of Canada’s neutral rate, saying it falls in a range between 2.50 and 3.50 per cent, assuming that all shocks affecting the economy have dissipated. At 1.25 per cent, our current policy rate is still well below our estimate of the neutral rate.”

    1.25% – 2.25% more to go.
    So we(bears) are not really speculating here about housing prices, we are just waiting for Bank of Canada to implement their planned +1.75% rate increase and have mortgage purchasing power reduced for every single Canadian by about 20% compared to now.

    I would definitely prefer to have $1000 mortgage at record high rate 15% (which can only go down from that point over the next 25 years) then have $5000 mortgage at rock bottom rate 1% (which can only go up from there)
    Pure financial planning, zero speculation.

  • vap 10 months ago

    Toronto is a pit locals called it hogtown, full of non locals now,similar to dumpy London, UK.
    Unless your into crowds, dirty, crime, and too high prices.

    • Read an actual crime survey 10 months ago

      Toronto was called Hogtown because the city had a massive meat packing facility, or it originated with a Globe and Mail insult. The history of the term is arguable but very old, 1898 or so.

      In all crime surveys Toronto is remarkably safe.

      Finally how could someone live in Toronto and be a non-local? Exactly what criteria are you using I wonder.

  • xelan 10 months ago

    Yesterday I was thinking about B-20 and I have a mixed feeling. I think it has to be cancelled soon, otherwise it may create more harm than good. Here are my thoughts below and I’m open to your comments.

    Scenario 1.
    You bought preconstruction before B-20 and trying to close after B-20. If you are maxed out it will definitely push you to alt. lenders. Overall for the economy it definitely creates extra vulnerability.

    Scenario 2.
    You bought preconstruction condo now and passed stress-test of 5.5%. Good. In 2 years when condo is finished and mortgage rate is 5% you need to pass another stress test at 5%+2%=7%. If you maxed it will push you to alt lenders as well. Again even in this scenario B-20 creates extra vulnerability for the economy and not really stress-testing anything because even after you passed it initially you failed it 2 years later when rates rose.

    Scenario 3
    You are buying a property on the open market and planning to hold it and stay with the same lender. In this case B-20 may be useful, no questions here.

    Preconstruction segment is where the most of exuberance is concentrated and it’s also the most important from the economy risks standpoint. B-20 makes situation even worse in that segment therefore increasing the risk of housing downturn.

    Thoughts?

    • Grizzly Gus 10 months ago

      I always thought that those that bought pre contruction would not be subject to the stress test if they entered that agreement before the rules were announced. The mattemy oakville thing someone what calls that into question though. Will have to do some more research.

      If you are right and new buyers (who bought before b-20) are subjected to stress test on occupancy that will be a very bad consequence.

      I do think the stress test will be abandoned at some point in the near future. Right now it is making sure that everyone who is buying today will be able to pay when rates normalize. Gives the market a chance to flush out higher risk borrowers (who sell and get out) for those that can weather more of a storm. If rates were actually to get into the high single digits I think it would be game over for most households. Unless inflation is looking really bad, I figure once BOC gets its benchmark back to neutral they will remove stress test. At that point I figure prices will be on their way down and the risk of people buying too much house will be reduced significantly

      • Grizzly Gus 10 months ago

        OFSI will remove stress test once BOC gets rates back to neutral

        • Investor 10 months ago

          Why would they need to do that? OSFI operates independently of BOC. OSFI doesn’t care what the interest rate is set at, just so you know.

          • Grizzly Gus 10 months ago

            Just so you know, I did say “I think”. You should start being more critical Investor. Blindly jumping around can lead to some serious mistakes.

            The don’t NEED to. Yes they are independent, but I am sure there is some behind the scenes convos going on.

            OFSI brought in stress test to protect big banks……….. probably because they knew rates would be going up.

            Once they feel rates have gone up far enough, I am GUESSING, they will remove stress test. If rates are at 5% we are already in a recession and it looks like rates will be cut rather than raised further why keep the stress test.

            In fact it is probably better to remove it, so that can banks will be able to better recap themselves and so also so there is more liquidity to try and put a floor on declines.

          • xelan 10 months ago

            Grizz, you are correct, they KNEW rates will be higher because that’s what BoC is openly translating for a while.
            They wanted to protect Big Banks, Taxpayers and Homeowners.
            As soon as that protection is no longer required I agree it probably make sense to remove it.
            However if they wont like I explained before I’m expecting more risks to be introduced by B-20 then actually removed from the overall economy.

        • xelan 10 months ago

          That make sense, I completely agree with you, just never heard them saying that stress-test is a temporary measure.

          • Maverick 10 months ago

            Xelan,

            I think more risk if introduced will be taken on by some ignorant buyers like those in oakville because they were too greedy. Nobody can save you in such cases.

            Whether or not B-20 stays or goes, it was only implemented as a policy to stop people from acting foolishly.

          • xelan 10 months ago

            I was studying one of the large private lenders and their prediction is that as a result of B-20 share of new mortgages opened by private lenders will grow from 10% to 14%. This is a huge share of uncontrolled market.

            Unfortunately it’s extremely difficult to stop stupidity, especially when you have such a big incentive as 24% YoY condo prices growth.
            B-20 won’t stop it, it will just shift risky buyers from from major banks to private lenders, increase mortgage fraud and other mechanisms allowing people to get into the market.

        • Alistair McLaughlin 10 months ago

          B20 is here to stay. They will not remove it. The stress test was brought in in anticipation of higher rates, not as a substitute for higher rates. The higher rates get, the more those regulations will be seen as needed.

          Remember, OSFI doesn’t care about the housing market. They care about the stability of federally regulated financial institutions. Periods of rising interest rates tend to be exactly what destabilises banks who have gotten too over-extended. The US Savings & Loans implosion happened during a period of high and rising rates. Various trust companies in Canada failed in the early 1990s under the strain rising rates. OSFI wants to prevent a repeat as we head into the next credit cycle. They aren’t going to back off. In fact, if I were to guess, I’d guess toward further tightening.

          • xelan 10 months ago

            Alistair, remember that every coin has 2 sides.
            You restrict buyers now when economy and RE is growing, same restriction will prevent faster recovery when we have a recession.

            All those limits which were introduced over the years to OSFI may be fine during normal times but each of them will also make the next housing downturn deeper if not canceled.

            But I agree with you, OSFI probably won’t remove it and may introduce new ones (however I think they should as soon as economy enters a downturn).

          • Alistair McLaughlin 10 months ago

            Regulators nearly always react in a pro-cyclical fashion. Just the way it is. Another factor – as housing prices fall, the impact of B20 lessens. B20 might stop you from buying a $600K house, but if that house falls to $450, you could be well within the stress test limits. That’s why B20 is killing Toronto detached while Ottawa is full steam ahead. Houses are 1/3 the price here. In Ottawa, B20 is immaterial for anyone earning a half decent income.

    • MH 10 months ago

      Your train of thought has been zigging and zagging in very peculiar ways lately. All the scenarios you are describing represent precisely why B-20 exists to begin with. These are questions that everyone needs to ask before borrowing, not some unintended consequences as you are trying to present it here. Extra vulnerability is created by unchecked greed and financial illiteracy, not by the safeguards put in place to prevent people from drowning themselves in debt.

      You what B-20 gone? Sure… if it goes along with CMHC so taxpayers are not on the hook to pay for indiscriminate lending (in other words borrowing). I am afraid you will be disappointed though, the moment it happens the banks will raise rates way beyond the stress test premium.

      And buy the way, everyone is already paying for this orgy and more to come. Here a good reaction to the latest guidance from Poloz:

      “So we have a monetary policy in Canada that is being influenced by the 8% of the population that blew its brains out on debt. How wonderful. This is why the rest of the country pays the price via a CAD that should be closer to 85 cents than 78 cents if Canada/US rate spreads were zero instead of chronically negative (with oil prices where they are trading today).”

      https://twitter.com/EconguyRosie/status/991669533420253186?s=19

      • xelan 10 months ago

        I agree, unchecked greed and financial illiteracy and I would add “fear” here as well creates all those problems but that’s human nature, you can’t really do anything about it. It was like this 200 years ago, it is like this now and most likely it will be like this in the next 200 years.

        I don’t think government should intervene and patch the hole with 100s of band-aids.
        They let people borrow like hell, they must allow them to deleverage the same way.
        Painful crash will allow to start everything from scratch, recover quickly and not “survive” like Japan for the last 25 years with population paying for all those years of QE experiments.

      • xelan 10 months ago

        I never told B-20 is a bad initiative. I think it’s a good one because it will definitely help valid buyers, but I just said it probably should be removed as soon as interest rate approaches the neutral rate, same as Grizz suggested above.

        I very much prefer all risky borrowers to shift to private lenders but since nobody has visibility into them it’s a huge risk for the whole economy.

    • MM 10 months ago

      I was watching an interview on BNN yesterday and the guest said that contacts of his in Ottawa told him that if the B20 rules don’t have the bite that they are looking for that they may target HELOC next. I thought that was an interesting comment. Here’s the video: https://www.bnnbloomberg.ca/the-real-economy/record-debt-testing-canadians~1384015

    • gear74 10 months ago

      What is your beef with pre construction condos? I believe I explained to you already that most of Downtown Toronto pre construction condo projects comes with assignment option. Me personally I purchased 2 pre construction condos in 2015. This condos not even ready yet but the cost of this condos went up 250000 each. Even if I am not going able to close my mortgage for any reason I can still sell my assignment and make nice profit. In this case I need to pay 50 % capital gain but it is still will be nice gain. So don’t worry about people like me, we will be ok.

  • Xelan 10 months ago

    Little piece of recent history:
    https://elpais.com/elpais/2018/04/17/inenglish/1523962404_349458.html

    From Wiki:
    “One of the main effects of this situation is the growth of household debt. ”
    “In fact, the Bank of Spain has warned each year about the high indebtedness of Spanish households, which according to the institution was unsustainable. ”

    Sounds familiar isn’t it?

    Spain has comparable population to Canada
    Comparable level of household debt before the crash
    Comparable household debt-to-GDP ratio

    Of course, it will be different this time:)

    • Alistair McLaughlin 10 months ago

      Amusing (but otherwise useless) Spain-related anecdote:

      In 2006, a guy living on the same floor as me in an Ottawa apartment came out of his suite one day wheeling 4 giant suitcases. I helped him load them into the elevator and said, “Looks like you’re going on a helluva vacation.”

      He said, “Not a vacation. I’m moving back to Spain.”

      “Permanently?”

      “Yes, permanently. When I left in the 1980s, the economy was terrible, no one could get jobs. Now it’s booming there. Everyone has money, everyone is working. I can make more money there than here. So I’m going back.”

      This was 2006 remember. I’m guessing he’s back in Canada now. I’d love to hear his on-the-ground experiences, but I never knew him that well and never kept in touch. I doubt I’d even recognize him today. But I’ll always remember him struggling with those massive suitcases, and how excited he sounded to return to his booming homeland. He’d packed up his life and was headed back to Spain, and couldn’t wait. The poor bastard had the worst timing ever.

  • Alistair McLaughlin 10 months ago

    The home sold for 25 per cent less than what John had paid just five months earlier, leading to hundreds of thousands of dollars in losses. “I was so greedy,” he says now. “I will not play the game like that again.” Painful as it was, he looks back at the debacle as a learning experience. He even purchased some books about real estate investment on Amazon to learn how to do it properly.

    http://www.macleans.ca/economy/realestateeconomy/toronto-real-estate-losses/

    I nearly pissed myself laughing at that last sentence. The guy sold the house for $475K less than he bought it, plus transaction costs, plus a couple months of mortgage payments at 12% interest, so he’s out $600K in the span of a few months. He says he learned his lesson. So he buys some books to learn how to speculate… sorry – invest, in real estate better! You can’t write comedy like that. Dude, you don’t need to do it better, you need to stop doing it.

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