Canadian real estate prices are booming, and more owners are trying to extract that wealth… without selling their homes. Equifax numbers, obtained from the Canada Mortgage and Housing Corporation (CMHC), show a breakdown of HELOC debt by region. Most of the debt is concentrated in just a few regions, that have seen home prices explode in growth. The concentration leaves these borrowers vulnerable to both higher interest rates, and a price correction. Both issues government agencies are warning is just around the corner.
Home Equity Line of… What?
A home equity line of credit (HELOC) is a popular method of secured debt. Homeowners take out a loan, and use their equity as collateral – like a second mortgage. The advantage is these secured loans usually come with a lower rate of interest. The disadvantage is utilization rates tend to grow when asset values are quickly rising, as more buyers use them to accommodate “lifestyle inflation.” In the event of a real estate price correction, this can compound issues for those in an already precarious situation. It turns out leverage works on the way down as well. Who knew?
Canadians Owe More Than $201 Billion In HELOC Debt
The outstanding balance of HELOCs stood at $201 billion at the end of 2017, with nearly half of the debt located in Toronto, Vancouver, and Montreal. Toronto real estate had $45.36 billion worth of HELOC debt outstanding, 22.47% of the total balance. Vancouver real estate had $24.58 billion, representing 12.18% of the balance. Montreal real estate had $21 billion, representing 10.46% of the total balance. All of that added up to 45.11% of all outstanding Canadian HELOC debt at the end of 2017. If that number seems large, that’s because it is, and it’s a serious drag on economic growth.
Source: Equifax, CMHC, Better Dwelling.
Canadians Spend Over $529 Million Per Month To Service HELOCs
That HELOC debt requires a large amount of cash to service. Across Canada, $529 million per month is scheduled for payments at the end of last year. The ratio of cities servicing their debt remained mostly the same. HELOC holders in Toronto are paying $120 million, Vancouver $55 million, and Montreal $49 million per month. To put the size of debt in context, it would take over 31 years to pay it off at that pace. That is, if no additional HELOC debt is issued, and no interest accumulated.
Source: Equifax, CMHC, Better Dwelling.
Since HELOCs are typically variable rate, and balances are concentrated in cities considered “overvalued” by the CMHC, it presents a significant problem. The normalization of interest rates can hit these homes with high debt servicing costs, compressing free cash flow through the economy. A correction in home prices can also leave these homeowners with less equity than they planned on having. If that weren’t big enough issues, it’s going to have consequences for an increasing number of Canadians using their home equity to avoid bankruptcy.
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Add data to indicate how much is Chinese local/foreign and how this portion has increased over past three years.
The “Chinese local/foreign” made me borrow against my home has to be the dumbest narrative I’ve ever heard. How does the type of new buyer, influence how existing homeowners act?
In your mind, is this what’s happening: “Well, you see, a Chinaman moved into my neighbourhood, and I just had to take out a loan against my house. They forced me to go out and lease a new BMW!”
While in general I agree with you, I can provide you a valid example:
If “Chinese local/foreign/ buyers” bid up the prices so the market becomes unaffordable for your children taking HELOC on your exiting property may be the only option how you can help them with downpayment.
@Xelan Your example is absolutely valid, in fact this is likely exactly what has happened.
Fundamentally doesn’t this piss you off though? Who created this mindset of average Joe leveraging Asset A to buy Asset B and Asset C when all 3 assets are the same type; RE? If devaluation occurs if the single asset time, the damage is compounded. Note: GoC did.
It’s the proverbial all eggs, one basket situation.
It doesn’t really piss me off because it’s FOMO and lack of choices moving those average Joes.
Average Joe only knows about RE market:
* It never goes down (because he never saw it going down or don’t remember it)
* It’s getting more expensive every year (driving FOMO)
* No other choices really available other than leverage further (otherwise you or your kids will miss the train forever)
It’s a self-vicious cycle and there is no rational way out of it. On the other hand it can’t last forever because you can leverage only that much until you have 0 equity. So it will come to an end one way or another but nobody knows when.
Just added the full calculations in the forum, but adding this here for general conversation. This is pretty crazy if you think about it.
The minimum payment on JUST HELOCs in Toronto would consume about 2% of all GROSS income in the city, per month.
Something like 40% of HELOC debtors aren’t paying off the balance at all – interest only. Another huge chunk are paying nothing, just letting the HELOC build up against their equity while their mortgage, hopefully, goes in the other direction. Those people are so exposed to even a small interest rate increase it’s not even funny.
No wonder they added HELOC provisions to B-20. During the US financial crisis, apparently most people did not benefit from the rise in home values, because of lifestyle inflation. Once the correction hit, they were forced to sell to accommodate their increasing amount of debt.
Nonsense! who pays heloc? they simply re-mortgage for another 25 years. That’s what all my neighbours are doing, Some had 15 years left and they simply just re-mortgaged. (since we bought home prices have more than doubled). Its becoming more evident they will never pay off these mortgages. Some say they can do this at least once more, they still have more than 45 percent equity left in home. (unless prices plummet, then all bets are off)
Those people will retire with big mortgages, older homes requiring increasing maintenance, and property taxes that only go in one direction. Not to mention living with serious interest rate risk in retirement. Probably a terrible idea.
It is not a concern for them as I see at least three generations living under the same roof. They pool and meet the payments .. and the grand kids will be forced to carry the debt whether they like or not.
The grandkids will not be forced to carry the debt if they refuse to have anything to do with the house when they grow up. By the time that generation reaches adulthood, they’ll be thoroughly Westernized, and being part of the family’s multigenerational mortgage scheme might be far less appealing to them. They’ll have bigger dreams than sharing space with the entire extended family and working to pay off their parents’/grandparents’ communal mortgage.
While this is possible, I hope our government will not allow that to happen (multi-generation ineptness) and just close their eyes when next recession hits us or design “soft landing scenario” which accidently becomes a “hard landing” one.
That will allow us to bring out debt levels and real estate prices to fundamentals and create growth in the economy with increased spending.
You should move away from your neighbourhoods. Their strategy is a losing one, they will end up tanking prices on your street when reality hits hard and they need to sell.
Your neighbors sound like idiots, even if prices go up. Re-fi that, over the next 25 years, if you average 5% interest, you’ve doubled the price you paid for whatever you used that HELOC for. Borrowed $100,000 to renovate the kitchen? That means paid another $100,000 in interest on that.
Middle class people that are keeping up with their neighbors, are forever banished to middle class hell because they don’t understand simple finance lessons like this.
What forum Jim?!
Just remember Cinderella, with the twelfth strike the magical debt balloon that keeps your investment condo price levitating will turn into a lead pumpkin.
Can people handle the debt? Sure. Will there be long-term consequences to the economy, requiring a write-down of asset prices, or wide scale monetary debasement in order to see the economy grow? Absolutely.
The problem with wide-scale housing speculation is the consequences spill out beyond someone paying a few extra bucks for their house. This is the money they could have improved their skills with more education, started a business, or funded the expansion of one. Instead, they have a $1 million house that will cost them $2.5 million after interest rates, and they’ll think they made a fortune when they sell it for $2 million.
Ian, I’m completely agree with you on long-term consequences and also “spill out” argument, however it seems like you are quite far from current investors/speculators “mindset”.
From my knowledge we can split those in 2 major categories:
1) Buy an “hold & rent out” with positive cash flow as inheritance for children, retirement plan etc.
2) Get in with minimum funds and get out before it crashes. This method is providing phenomenal ROI lately. You can buy 500k condo with 0% down if you are creative and turn it into 750k condo a year later or $800-$1m condo 2 years down the road.
With $0 in your pocket you are up 300-400k in 2 years.
This if a phenomenal return and additionally government pushed valid buyers by interest rate increases and B-20 into the same condo segment competing with those investors/speculators.
Since you can’t get positive cash flow anymore it’s basically only Category 2) speculators left on the market and it will end badly for those who fail to get out of the market before it slows down.
I assume Toronto and Vancouver here represent just those two cities and not GTA / GV since I expected GTA and GV to be accountable for least 60-70% of all HELOCs.
It’s quite strange that author left 40.8% allocated for “Other” category without providing a breakdown for such a large share.
Is it that strange? Half of mortgage debt is in Toronto and Vancouver. There’s 162 cities in Canada. I’m sure splitting up that 40% into the other 156 cities, plus towns and rural HELOCs would clutter up the chart, and detract from the point – which is there is a high concentration in 3 cities. 3 cities have more than 156 other cities in Canada is the real issue.
If I take a HELOC against my house to have ‘just in case I need it’ will that show up in the numbers? Or is $200bb the ACTUAL debt, and not the AVAILABLE debt?
Good question. My guess would be it’s ACTUAL debt because a lot of articles say about interest payments on HELOCs. If you haven’t used it you don’t have any interest payments.
It’s actual debt, not available credit.
When they say outstanding, it’s the debt that’s been used. Additionally, Equifax wouldn’t have payments scheduled to service it. An open HELOC with no debt has no payments.
I took out a heloc on my house to help my kid pay for his med school tuition. I think it is a good investment. I wanted to help but did not have the cash.
@Roscoe, sign a contract with them to make sure they pay you back
Nothing wrong with helping your kids, but let’s not delude ourselves into thinking that tuition for the next generation represents an investment for their parents. It doesn’t. My parents helped us out with school too – all four of us. It was always a cost, never an investment. And we saw it exactly as that.
As for trading student debt for parental debt, well, I’m not sure that represents a real advantage.
It’s a terrible idea, since student debt is the cheapest loan you can possibly get. Why take out a variable rate HELOC, when they can float it at 2% until they graduate?
and yes, my parents also viewed our tuition as an expense. An investment in happiness and success, isn’t an investment that actually translates into real dollars most of the time.
That’s the problem with modern world. We only “borrow”, we don’t “save” anymore.
Every borrowing drives up prices. In your example your borrowing will drive price of the medical school your kid is applying to. (because it creates extra demand).
I’m not saying you are doing anything wrong and it’s not the right thing to do. In this environment you probably don’t have other choice.
Just make sure you can sustain much higher rate on your mortgage and HELOC and have some money left aside so you are protected from any downturns.
The real question is when/if there will ever be a major correction/further drop in prices? Doesn’t seem like anything can take the wind out of the sails. Toronto core is booming.
Only in condos, and it’s a classic case of price capitulation as a result of dumb money piling in. No luxury, means no upgrade flow. No upgrade flow, means these are buyers absorbing inventory that’s being unloaded.
Freehold is moving fast and way over asking prices. Trust me, i’m looking and wish it wasn’t the case.
I feel the market is over valued but there are clearly buyers with a lot of money who are willing to spend it on a home. It is just tough being a buyer when every single house has an offer date/bidding war and you’re expected to enter into a blind auction for an asset you feel is already more than you think it is worth at the list price.
Rippin. I have some bad news…….. You better sit down…. You crashed your financed motorcycle and have been in a coma for the last year. It is now May 2018. All of your friends are broke, no one wants to buy your investment property in northern Oshawa and your interest payments have gone up.
This is the case with us also. There are clearly buyers flush with cash or concentrated in the same budget category with a little more flexibility in what they would be billing to pay.while prices have come down some in the freehold town category there are still offer dates and bidding wars in the 905.
Freehold prices are down from last year yet there are bidding wars and homes selling for over asking. What does this tell us? That despite these bidding wars, the actual price of the houses are much cheaper than last year so the fact that they’re selling for over-asking masks what’s really going on. It’s akin to a sleight of hand.
Prices have and are coming down however it doesn’t happen overnight. Also if there is any pop it is expected so really wait or pile in knowing it will go down in value over the next 6-12 months. This is a house you should be living in and not viewing as an investment. That’s how we got in this mess. BD4L.
Where are prices coming down? Not in the Toronto core. (South of Eglinton and North of College, East of Dufferin and West of Avenue Road)
Only reason to wait is because you’re not really getting anything decent below about 1.5mm. Below 1mm and you’re getting a fixer upper. Not great value.
Freehold inventory is growing every day, and sales are way down. The 905 region has had a major price correction and it’s only the beginning. A few pockets of bidding wars is not enough to change the trajectory of the overall market. These are signs of an exuberant market taking its dying breathes. The last of the stupid money will peter out within the next 2 years. Prices are sticky for this reason.
Pat, your last sentence is intriguing: “No luxury, means no upgrade flow. No upgrade flow, means these are buyers absorbing inventory that’s being unloaded.”
Can you elaborate on this please?
Yes there will be a correction. Right now stupid money is piling into condos with the hope of further appreciation. Once condos become prohibitively expensive, and appreciation plateaus, the horror will begin. It doesn’t even make sense to invest in new condos for rental income anymore so it’s a 100% speculator’s game now. The smart money made off in 2017 while the stupid money is investing now. Upon completion, the prices of these condos will be too high for anyone to buy (it’d make more sense to buy a freehold house) and if they hold, they will lose thousands each month. This is going to cause a sell-off. And half of new condos are being bought by these “investors”. Very bad days ahead for those folks.
Dividing total monthly service cost by approx 15M households in Canada … monthly cost does not seem that high…? unless I am making some mistake in calculation. Same for Vancouver… $731M a month divide by approx 1M household… turns out to be $731 a month in mortgage payment… that is very low…
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