Canadian real estate continues to be used as an ATM to drive the economy. Office of the Superintendent of Financial Institutions (OSFI) numbers show the balance of loans secured with homes hit a new high in March. While the outstanding balance did hit a new all-time high, we did witness the first taper of growth in over a year.
Loans Secured Against Residential Real Estate
If you already know what these are, you can skip this. For those that don’t know, a loan secured against residential real estate is a type of secured loan, where the borrower uses the equity they’ve built in their home as collateral. If they default, the lender can go after the home. The most common form of this type of loan is a HELOC, but they come in a few other flavors. These loans are popular, since it’s one of the few ways to tap that rising home equity, without having to sell.
Regulators break these loans up into two segments, personal and for business purposes. If you’re borrowing against your home to renovate your kitchen, or buy a new Ski-Doo – that’s for personal purposes. If you’re going in for a business loan, and they ask you to put up your home, that’s for business purposes. Expansion of personal loans is great for short-term spending, but borrows future income for that spending. Expansion of business loans is often seen as good, since it’s a calculated risk to make more money.
The Total Balance Grew By Nearly $1 Billion
The total of loans secured with residential real estate climbed once again. The outstanding balance stood at $284.64 billion, up $994 million from the month before. The total increase works out to a 7.73% increase from the same month last year. That’s a gaping wide hole in the homeowner equity we’ve been hearing about.
Total Loans Secured With Residential Real Estate
The total of personal and business loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Personal Loans Against Real Estate Growth Is Decelerating
Personal loans secured by residential real estate hit a new high. The balance reached $252.15 billion, up 0.2% from the month before. The total is now 6.51% higher than the same month last year. The new high isn’t the biggest takeaway from these numbers.
Personal Loans Secured With Residential Real Estate
The total of personal loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
The most interesting data nugget here is the annual growth rate. The 6.51% annual growth is the first tapering of annual growth since 2016. It’s only a month, but it does bring up an interesting question. If personal loans were being used to bolster the economy, how does that spending continue if HELOC growth slows?
Personal Loans Secured With Residential Real Estate Change
The annual percent change of in the balance of personal loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Business Loans Against Real Estate Rises Over 18%
Business loans secured with residential real estate made a big climb, but the balance is tiny in contrast to personal loans. The total balance reached $32.49 billion, a 1.53% increase from the month before. The annual increase works out to 18.3%, which is huge – but nothing close to the 80%+ growth we saw last year around this time. These are those “good” loans, so they obviously are lower than the non-productive loans.
Business Loans Secured With Residential Real Estate
The total of business loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
If the pace of growth doesn’t seem large, it’s because the numbers are so large they’ve lost all meaning to you. The nearly billion dollar rise in outstanding balances in March, is the equivalent size of 5% of all home buying activity on the MLS that month. The growth rate now outpaces that of national home price growth. No one wants to admit it, but these loans are likely a key driver of consumer spending.
Like this post? Like us on Facebook for the next one in your feed.
“… it’s because the numbers are so large they’ve lost all meaning to you. ”
Ain’t that the truth! They are looking at the future through binoculars the wrong way around.
lolllllllllllllll, i love it…welcome to Canada, the dumb and dumber show part 3, What a mess, housing bubble, stock market bubble, record debt levels, personal and government, greedy PS unions, baby boomers…POP, its coming…will be fun to watch from the sidelines…suckers…lollllllllllll
Won’t be fun for most of us. Unless you’re independently wealthy, the suffering will spread far beyond the irresponsible ones who caused it. In fact, some of the biggest idiots, be they lenders, consumers, or politicians, will likely skate on it and get bailed out. Many others who tried to be responsible and cautious, but who still dependent on their jobs to support their families, will be collateral damage.
Don’t get me wrong. It needs to happen. But I’m not deluding myself into thinking it’s going to be fun. I’ve saved as much as i can and will continue to do so. But I remember what the early 90s recession was like. Not a quick drop and then a quick bounce, but 7 years of grinding recession and jobless recovery. For anyone not old enough to remember what a jobless recover is, it’s like a recession that doesn’t end. Allegedly the economy is growing, but the jobs don’t come back. That was life from 1992-97 in Canada. It sucked. The next one is going to be deeper, longer, and suck even more. I don’t take any pleasure in that.
Borrow and borrow.
Borrow the sorrow.
Borrow my pain.
Borrow the sane.
Borrow my chair.
Borrow despair.
Borrowing time.
Borrowing slime.
Tick tock. BD4L.
I’d say the market is just in an itsy bitsy gully right now.
https://www.youtube.com/watch?v=PgGLgygsqus
No need to panic
“They are not confessing, they are bragging.”
LOL
Brilliant!
True. I know couple of RE agents servicing the newly arrived immigrants. The action starts from the port of arrival where the families are picked up by these overnight RE agents. Then they somehow convince the newcomers to purchase a home by dumping the whatever the wealth they bring with them by selling their assets back home to make the 20% deposit. the RE agents have a complete team that could provide payslips overnight, mortgage brokers etc. ,99% of these folks will never have a steady job and end up making the minimum wage by working at the fast food restaurant. What else can you expect when educated natives of this country find it difficult to find a job. Then there are “Half-baked” investment advisors from the same ethnic groups who provide expert advise promoting to purchase per-construction condos by using the equity of the homes has been the trend last few years (1-3) contributing partly to condo price escalation. The prices are falling rapidly in the York region. The (3+1)+2+1 duplexes advertised for 745k sold for 735k in mid April are currently sitting unsold for months even advertised as low as 699k.
What ?
What’s telling is that despite the frantic media push over the recent days it is obvious that RE industry is completely out of narratives. Their last stand basically amounts to telling prospective buyers that they are up against [drumroll] The Seller who has the nerves of steel, exhales fire and poops extra large jalapeño peppers. You want that house, buyer? Come and get it.
Sorry, but there will be no rumble, the Seller is about to collapse under the weight of the mountain of debt. Contrary to what RE industry wants you to believe, this is not the face-off between the sellers and buyers, this is a showdown between the sellers and debt. Guess who is going to win…
The best thing prospective buyers can do now is to invest in popcorn, keep their powder dry and make sure that they don’t get cajoled into this mess until the dust settles.
Well said, good advice and even greater insight, your 100% right sir!
thank you.
Yep. They’ve been telling everyone for a decade that “owners won’t sell their homes for less than they think they’re worth.” Now that prices are coming down, they’re cashing in on that theme with the logical extension – that sellers aren’t going to budge, but will wait for a recovery, so if you want to buy a house, buy it now. It’s asinine. If sellers were always in control of the market, prices wouldn’t drop anywhere, ever. Which is what they want us to believe.
These numbers, looking at them from a perspective of total outstanding loan amount from 2012 to today don’t look so bad. $240 billion in 2012 to $285 billion today is a 19% rise in 6 years. Is that a lot or a little? In Vancouver, over those 6 years, home prices have generally doubled. So the loan amount outstanding to the ‘paper equity’ ratio would have gone way, way down.
It would be more informative for BD to publish a chart of total home equity / outstanding loan amount.
Here’s the problem Bob. Debt isn’t serviced by equity. Debt is merely secured by equity. Debt is serviced by income. And incomes have scarcely budged over the past 6 years.
Rising debt against stagnant income is every bit as bad as it sounds.
Here, Here…..
The feeling of wealth may come and go, but the hangover and debt due doesn’t change.
This article is only showing loans secured against RE. It’s not showing total residential mortgage credit (data from StatsCan):
2013 – $1,180,695M
2014 – $1,240,333M
2015 – $1,310,648M
2016 – $1,393,875M
2017 – $1,479,420M
which is slowing down significantly now:
http://business.financialpost.com/real-estate/mortgages/mortgage-growth-in-canada-hasnt-been-this-weak-since-2001
Bad news for bulls.
Thanks Xelan.
In addition to what Alistair said, the scary part Bob is not the 19% rise in the last 6 years. The scary part is the steep curve and 10% increase since April 2016, aka the beginning of the correction.
That means that aside from losing 10% of the value of their homes (i.e. equity/wealth), people have piled up an additional 10% in debt. There is only one explanation and that is that since April 2016 people are actually using their home equity lines to survive (i.e. borrowing to pay their other debts or expenses).
“No one wants to admit it, but these loans are likely a key driver of consumer spending.”
Interesting thought, but it doesn’t look like it’s the case to me.
“Personal Loans Secured With Residential” grew by $15B (according to the chart presented here)
within last year.
Household consumption in 2017: $1.2T
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ04-eng.htm
Personal loans is only 1.25% of total spending. Unlikely it’s a key driver however definitely a contributing factor.
Even if personal loans is not a key driver of spending its impact is quite significant.
based on same StatsCan numbers it accounts for 21% of total household spending growth.
And since spending accounts for 58% of GDP, that 1.25% number translates to 0.725% GDP growth.
I’m seeing a pattern here, when the prices fall a bit and FOMO strikes in the market, the new buyers and existing home owners enter and buy homes, that’s when we see the peak in borrowing. Look at borrowing between May 2017 and June 2017, its f*king 11.5 Billion in just 30 days…FOMO is CRAZY..right after the borrowing slowed due to the foreign buyer tax where buyers feared a CRASH…now started to peak again as we see prices falling a bit, but I think this is a bull trap, wake up BUYERS…you won’t be given another chance again…
Meanwhile in West Vancouver:
https://twitter.com/xelan_gta/status/998241441125228545
I also published some calculations about sustainable RE price growth number.
Sustainable growth – means it can be like this (on average) pretty much forever.
With 2% household income growth and 3% property price growth Price-to-Income ratio will be 140k in 1000 years (it’s about 8 now for Toronto)
With 5% property price growth Price-to-Income ratio will jump to 31 Trillion over 1000 years.
For those who are not sure what Price-to-Income ratio means – you will need 31 trillion times an average salary to buy an average home.
8% price growth can’t be even supported for 20 years, not even saying 1000.
So there is no doubt the party will be over. It may not happen tomorrow or this year but there is no doubt it will end and RE will return to the levels supported by fundamentals.
“So there is no doubt the party will be over. It may not happen tomorrow or this year but there is no doubt it will end and RE will return to the levels supported by fundamentals.”
Where I live, the price/income is ~ 40, and has been for quite some time. It is totally disconnected from local fundamentals. It is why I have neighbors who are frothing at the mouth over having to pay a new $6,000 annual surtax on their $5,000,000 home. They are wailing that they are poor middle/working class type who cannot afford the tax. Because when they bought their homes … they were middle class. But now they are upper echelon one-percenters and have no idea, because they don’t ‘feel’ rich.
The only way this neighborhood could ever return to local fundamentals would be if there was an outright ban on offshore buying. Because based on worldwide one-percenter fundamentals, the prices here are still reasonably attractive. As long as offshore global concentrated wealth is flowing here, there will never be a return to local fundamentals.
Really? They want to be taxed based on their financial stature years ago? Then I should not be taxed at all because I did not have any taxable income/assets when I was in middle school, plus I don’t “feel” like being taxed.
I suspect that those who are wailing the loudest used up their house equity to support their not so middle-class lifestyle paying little to none taxes and seriously believing that this is the way life is meant to be forever.
What a clusterf*ck…
Exactly. If they were sitting on $5 million in equity, then the logical thing would be to sell the house, take those tax free dollars, and live happily ever after somewhere else. The fact that they’re wailing about $6000 per year means they can’t do that – because the borrowed against that equity (to buy income properties?) and don’t have the money. Funny how when you over-extend with excess leverage secured by a single asset class, it comes back to bite you. Who’d of thunk it?
Bob, don’t get me wrong, you can’t expect every single pocket or neighbourhood to become affordable.
When you talk about fundamentals you have to select the most financially isolated areas like Canada as a whole or GTA/GV where local income earned and spend within that entity.
Oakville, for example may not fully follow fundamentals because big part of household income there is actually imported from Toronto.
Therefore while some neighbourhoods will always represent luxury markets GTA and GV markets in general will return to fundamentals.
As for foreign investments – those are only here because returns are great or because they can launder money through Canadian RE, as soon as returns slow down and money laundering issues are resolved foreign investments will disappear naturally. It’s happening right now in your Vancouver area and it’s just the beginning.