Canada

Canadians Using Real Estate To Secure More Debt Reaches New Growth Record

Canadians Using Real Estate To Secure More Debt Reaches New Growth Record

Canadians are putting up their residential real estate to secure loans, at one of the fastest rates in history. Office of the Superintendent of Financial Institutions (OSFI) numbers show the balance of loans secured by real estate made a seasonal decline in January.  The seasonal decline however, is at a much slower pace than previous years. The result? The balance of personal loans secured by real estate is showing record growth. Meanwhile,  “healthier” business loans secured by real estate is tapering.

Loans Secured Against Residential Property Are.. What Again?

Loans secured against residential property are loans where the homeowner uses their house to secure a bank loan. A home equity line of credit (HELOC) would fall into this category, but a second mortgage would not. There’s two major categories of borrowers, those that do it for a business reasons, and those that do it… for who knows what. Those that do it for business purposes are seen as a good thing, since they’re borrowing for a productive asset. Ideally they’re going to create a new income stream, and expand the country’s economy.

Those that do it for non-business reasons are typically doing it for consumption. That is, they’re using it for anything from renovating their kitchen, to buying groceries, to a new Ski-doo. It’s debatable whether this is a bad thing or not, but it’s an easy way to get into trouble with debt. It becomes of particular concern when they grow after rapid price increases. A price correction could leave these borrowers disproportionately exposed to losses.

Ontario debt expert Doug Hoyes, has even expressed his concern in this area. He’s seeing an increasing number of people using second mortgages, and HELOCs in order avoid bankruptcy. It’s actually become so much of a problem, that OSFI snuck in some new HELOC regulations into the B-20 Guidelines. Yes, many homeowners may be poorer than you think.

Personal Loans Against Residential Real Estate Is Over $249 Billion

People are securing loans with their homes at the fastest pace recorded. The total balance of loans reached CA$249.73 billion in January, which is actually a 0.18% decline from December. This brings the annual rate of growth to 6.71%, the highest number since OSFI began tracking these segments separately. Yeah, I know what you’re thinking. How does a monthly decline still result in the highest annual rate of growth?

Source: OSFI, Better Dwelling.

January normally a decline of personal loans secured by real estate. Over the past 4 out of 5 Januaries, we’ve seen the balance decline. However, this decline was much smaller than normal. The median monthly decline for these balances is -0.41%, so we’re seeing growth over 56% higher. TL;DR January declines in the balance is smaller than usual.

Source: OSFI, Better Dwelling.

Business Loans Against Residential Real Estate Is Over $31 Billion

Business loans against real estate is actually seeing growth taper. The total balance of business loans secured against residential real estate reached CA$31.73 billion in January. That’s a 1.72% decline from December, tapering the annual growth rate to a respectable 18.55%. Whether this is a good thing or a bad thing, depends on if you think people using their home equity to secure business loans is a smart move or not.

Source: OSFI, Better Dwelling.

The growth rate is still pretty large, but is tapering fast. The 12.37% annual growth is the lowest growth rate since December 2016, which wasn’t all that long ago. A steep decline from June 2017’s 84.18% rate of growth. It appears declines for the business numbers are relatively rare in recent times.

Source: OSFI, Better Dwelling.

As high as these numbers are, these are OSFI numbers. This means we’re only seeing numbers from federally regulated financial institutions (FRFIs). These types of products are popular at non-FRFIs as well, such as credit unions, B lenders, and private lenders. Any non-FRFIs would not be reflected here, so the balance is likely higher.

What this leverage is being used for also could be a problem. For example, using these loans as a downpayment on a second home is likely a popular option. I know, who does that, right? We don’t track stats on that, but there’s no shortage of people asking for advice on how to do it (example, here and here). This of course, is in addition to people that are withdrawing downpayment sized loans from their homes through refinancing and second mortgages. If regulators aren’t concerned by the size of loan balances, they should be concerned by the structure.

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50 Comments

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  • Dave 1 year ago

    You forgot paying their property taxes. A lot of people that became property rich, need to borrow from their home in order to cover taxes. Property tax bills are growing faster than wages in many parts of the country.

    • EC 1 year ago

      Good point, Dave. I live in the GTA and my property taxes nearly tripled (being phased in) in the space of 3 years – from 5K to 13K. An extra 8K is not small pocket change for most folks.

      • Mortgage Centipede 1 year ago

        Most homeowners can’t take a $200 increase in expenses right now. If we didn’t have the ability to defer taxes in Vancouver, we would be seeing a massive exodus of Boomers.

        Instead, those working get to subsidize their low interest deferrals.

    • Knotmi Rhelnm 1 year ago

      Don’t worry. The Chinese are just around the corner ready to pick up your home now that you can’t afford its operating costs. Of course they will pay above market, which will ratchet the price up higher. Soon only Chinese Fentanyl dealers and money-launderers will be occupying all the desirable school districts. If I wasn’t closely following GTA real estate figures this would almost sound like a conspiracy theory. Better brush up on your Mandarin. 🙂

      • Yu 1 year ago

        GTFO with your anti-Chinese sentiment. Blame the Bank of Canada, that’s made it so cheap to borrow, home prices could easily absorb the rise.

        What kind of sad, mono cultural upbringing did you have that you don’t know of any other races buying houses in Toronto?

      • Grizzly Gus 12 months ago

        Yu is right, Knotmi cut out the racist shit.

        Dirty money has been flowing into our market from all over the world. Blame our politicians and regulations (CONS and LIBS) that have made this a dream come true for criminals. Dont blame a dog for being a dog.

        Yes there was a flood of money out of china a few years ago, and yes buyers from there made up a larger proportion of foreign buyers than they had in the past, but the rich Chinese man buying up all of our property narrative was a tool used by the RE industry to generate more FOMO for the local buyer. Yes they foreign money can bit up the marginal property increases the perceived value for an entire neighborhood but this was overstated because it allows one to be fooled into thinking local fundamentals do not matter anymore…………… IE, its not local income that matters anymore.

        Also, allowed canadian governments to shift the focus away from their bad policies and rules which facilitated money laundering and its roll in driving up prices…….

        • Grizzly Gus 12 months ago

          I also think that with China’s capital controls and their perceived deleveraging push, that we will be seeing fewer and fewer “Rich” foreign investors from China entering our market. Not to mention that if our prices continue to drop, those foreigners with money will probably choose to invest elsewhere.

          • Bluetheimpala 12 months ago

            Emperor Xi put a call on his capital last year and everyone is falling in line. He just created a corruption bureau to pick up any stragglers but Mark my word, come fall the amount of Chinese money will be a drop in the bucket vs Now. Xi has grand plans and his oligarchy need to pay papa.

        • Bob 12 months ago

          ” it allows one to be fooled into thinking local fundamentals do not matter anymore…………… IE, its not local income that matters anymore.”

          Fooled? wtf??? who is being fooled? The disconnect between housing costs and local incomes in Vancouver is such that house prices would need to remain flat for 150 years for income growth to catch up. Local incomes are 100% completely disconnected from house prices here. There is no fooling anyone. Our housing stocks total value is quite modest compared to the tsunami of cash being hoarded in communist trade surpluses. And it comes back here to buy real property, regardless of price, regardless of local incomes.

          Bluetheimpala – don’t you think that part of the grand plan is to own Canada, Australia and New Zealand outright? With ownership comes control, and no questioning of what the owner is up to.

          • Grizzly Gus 12 months ago

            You missed my point. I am saying it fools the local buyer into thinking we are not in a housing bubble of massive proportions.

            Buyer “I’m worried about inflated house prices….. how can anyone afford these properties…… could we be in a bubble?”

            RE Industry – “No bubble, Toronto is a world class city. Local incomes dont matter. You are competing with rich people from all over the world”

            That being said, the cash tsunami that fled china, where their FX reserves dropped by a trillion dollars in a two year window is over. Start of 2017 China really started to crack down on this. My speculation – The huge spike and bitcoin mania was a response to this. Bitcoin started to take off end of Q1 2017. At a time, 97% (or something like that) of Bitcoin activity was happening in China (early-mid 2017). Since then China has cracked down hard on Crypto and China has fallen to a march smaller share of bitcoin activity. (I dont believe in Bitcoin and dont follow it that closely).

            China can not afford to have a lot of capital leaving the country until they get their internal debt problem under control. If anything I believe we will start to see foreign owners unloading oversees assets to settle their bills at home…….. This is starting to be seen with large Chinese companies such as Anbang, HNA, Dallia Wanda, CFEC, and more.

            China will win the war against capital flight.

            Canada is waking up to the money laundering scams, and we are seeing rule changes.

          • Dennis 12 months ago

            18 months ago I would have been more worried about foreign investment, now tools have come about that remove the risk.
            Like foreign buyer’s tax.
            It can simply be raised up to 100% if need be.
            Also speculation taxes on flips and non-income tax paying citizens.
            It’s a fine balance 15% in GTA and now 20% in GVA. It can always be adjusted, now that we proved it can be done.

            For the amateur foreign investor this is a huge hammer over their heads. 2%-5% yearly on the property value, yikes!

      • Bluetheimpala 12 months ago

        Not the place piss weasel. We did this to ourselves like a dog who eats too much, pukes and then eats the puke. The last 6 months we’ve been eating the puke and until the bad money gets out we can’t move on. Don’t be ignorant. Live in the light. Pain is coming. Tick tock.

      • Functioning Brain 12 months ago

        Who is going to teach in these desired school zones if said teacher can only afford to live in their van? Ponder me how desirable those zones will be when there are no teachers in them.

      • Bob 12 months ago

        They are not all Fentanyl delaers. There are many, many party and SRE officials looking to get their communist kickback cash out of the country.

        And yes, they ARE the exclusive buyers of Vancouver SFDs. What Canadian, on income earned (and taxed!) in Canada, can afford $4,000,000 for a small starter home?

  • BOO 1 year ago

    Good point with secondary lenders. The people I’ve been seeing go through the broker channel don’t have the credit required for a HELOC. They end up having to go to private lenders, etc. There’s a reason shadow banking is half the size of our regular banks. There’s a lot of off record lending occurring.

  • Party on 1 year ago

    “The borrowing and spending binge by Canadian households, businesses and governments (all levels) continues unabated.

    At the end of December, 2017 the total debt outstanding in Canada (bottom line of the Statistics Canada credit market summary data table) was $7.603 trillion. At the end of December, 2016 the total debt outstanding was $7.25 trillion. In the 1 year period from the end of December, 2016 to the end of December, 2017 it increased by $353.5 billion. This is an increase of 4.8%.”

    http://owecanada.blogspot.ca/2018/03/canadian-total-household-business-and.html

  • Doug 1 year ago

    Isn’t using a borrowed down payment illegal?

    • Mortgage Centipede 1 year ago

      Who’s going to stop you from getting a “gift” from your parents, to get that insured mortgage. That banks aren’t worried since taxpayers will bail them out if you default. No one’s checking downpayment sources.

      • Knotmi Rhelnm 1 year ago

        Mortgage Centipede. You are so much more correct than you know. Each bank has a team of underwriters aged in the low 20s just out of school trying to hit turnover and volume numbers. When a risk is presented that is outside of their mental capa – rather outside of the check list they follow, it will be passed on to the appraiser for an adjustment in wording to make the risk appear to be addressed. The appraiser, likely struggling with command of the english language (if they reside in Canada at all), making $30 to $90 per job in a highly competitive market will abide to close the transaction as fast as possible. The amount of risk shoveled under the carpet in this fashion is egregious.

        • Bluetheimpala 12 months ago

          Cut it out dude. You have some value in your comments that gets dusted by your lack of class. Millennials and ESL aren’t running around covering bunk mortgages…there are just as many guys in there 40s who’ve lived here their whole lives riding the wave and fucking it all up.. . You remind me of a caker drinking 50 in some Hamilton dive bar who makes a good point about Wynn but then torpedos it by calling her a dyke…don’t be a fool. I know you can do it!

          • Andrew 12 months ago

            He’s not accusing millennials of riding the wave he’s accusing banks of using under-pressure newcomers to shoulder the risk/responsibility. But I agree the ESL comment was out of left field.

  • Grizzly Gus 1 year ago

    Do not know how prevalent this is, but I have read about it in a few articles (I will try to find) and I do personally know one individual who is doing this, BD maybe you can do a write up for us.

    Anyway, there are people out there who take out HELOCs at 3-4% and then lend that money to other buyers at 12-18%. Again, have no idea how big this is, but it could impact the percentage of those securing loans for “business purposes”. Basically, not borrow money to start a productive business that is going to hire people, but rather borrowing to lend to someone who wouldn’t qualify at a traditional bank for a higher spread.

    From what I have read there are a few strategies to who these lenders will lend to and the terms. The individual I know personally only lends to existing home owners and is fine to have the loan outstanding for a 25 year term. ( i think hes nuts and have recommended him to this site several times). Another strategy however is to help people get their down payment together for a first property, then to refinance the loan to their bank mortgage a year later for a lower rate…….. Works great when homes are appreciating.

    • Mortgage Centipede 1 year ago

      There’s quite a few, but you won’t be able to get numbers since it’s mostly off government books. Contact a mortgage broker and ask if they have any syndicated mortgage programs. They’ll give you the details, as well as suggest private lending.

      It’s a shit show since these are usually lent to groups that won’t qualify at normal lenders for a reason.

      • Bluetheimpala 12 months ago

        Alt lending will be our Subprime… Vancouver will be left in the dust in my opinion because it started there and no one seems to have a fucking handle on it. I think Bay street will let it burn… Pay back for all of the good weather they have out west.

  • Chad 1 year ago

    Has BD jumped the shark? Not only is this not really news or surprising it also seems that BD is adopting this chicken little approach to every storey. Don’t get me wrong I believe there are things to be concerned about but not on a dailey basis and if you look at the Ontario markets as a whole the are plenty of good news topics to discuss as well 🙂

    • Bluetheimpala 12 months ago

      Jumping the shark? Not really. There is a lot of data out there that does not see the light of day. BD isn’t referencing Australian sales numbers, for exam, and reaching to make it relevant for us… This is Canadian data we should consider when evaluating the current environment. Sure they could spin everything to sound positive but that’s what RE agents and journalists are for. Welcome to the light… Tick tock.

    • carlton 12 months ago

      ” if you look at the Ontario markets as a whole the are plenty of good news topics ”

      Go ahead Chad, lets have the plenty of good news in the Ontario markets, point form will be just fine.

      • Asian Invasion 12 months ago

        I’ll settle for one point. CREA is calling falling sales and prices across Ontario. CREA!

    • C 12 months ago

      My friend is a bank manager at a credit union and she told me this past weekend that many of her members have been caught trying to buy houses, but havent been able to sell theirs at the expected price.

      She said they now tell members they should have their house sold before they put in offers on any other homes.

      And some members cant and wont even get pre-approved without a firm sale on their current home. And this is due to home sales that have tanked in our area, and some sales that have fallen through.

      I thnk things are actually worse than we realize.

      Ive said it before, the government and banks would not be putting in so many measures unless there was a real need, they rely on the resources of home sales too much.

      • Asian Invasion 12 months ago

        Always recommend clients sell their home first in an environment like this. Even one of the TREB directors has said this public ally. When TREB directors think this is a rough market, anyone saying otherwise is fooling themselves or lying.

      • kccpac 12 months ago

        Wrong advice. Should be “close” rather than “just sold”. Firm deals may go bust if lending institutions stop lending (or purchaser change their mind) at the last minute..

        • EC 12 months ago

          Kccpac – “sold” or “sold firm”, ie. all conditions removed and preferable a hefty deposit. A sale closes when the buyer has the keys in their hand and the seller has (typically) moved out. Advice to have the sale “closed” before buying a new house would be unrealistic.

    • Asian Invasion 12 months ago

      This is a data blog, and the data isn’t good. Data counters spin either way. When expectations are high, it brings it to the baseline. When expectations are low, it brings it back up to the baseline. After a 30 run of optimism for the market, you’re going to have to put up with a few years of bad outlook.

      Do you have a single data point that is good right now? I’m an agent, and I’m not seeing a lot. Even if you look at Halifax, they’re seeing prices outperform New York. YES, HALIFAX, CANADA IS SEEING PRICES GROW FASTER THAN THE WORLD’S WEALTHIEST ISLAND.

      If you can’t take some real discussion, spend less time here, and more time lying to your clients.

      • Condox 12 months ago

        This is the only data blog that I can find that has reliable information backed up by sources. If the news is bad it’s bad. How else can you explain it?

        I think BD is a breath of fresh air to the putrid optimism that’s spewed out from the cracks of our industry. The reason why we are in this mess in the first place is because agents like you keep telling their buyers to pay more. I wish everyone in the industry said to their buyer’s “hold on… it doesn’t seem right that you’re paying tens or hundreds of thousands above the asking price, I recommend you pay less than the asking price.” Or, “the developer is asking too much for their new condos let’s all not buy so he reduces the price.” Wishful thinking I know but the point is we create the market by what we advise the buyers. Unfortunately, the majority of buyers are getting really bad advise which leads to more bad advise.

        Go crawl back in your hole and keep selling my listings to your buyers. CREA is predicting prices to go up again in 2019 so you better advise your buyers to get in before then before it’s too late.

        • Jayson 12 months ago

          People are not smart
          People are retards
          People are sheep
          This is why these things happen

    • Knotmi Rhelnm 12 months ago

      From my perspective, 50% is optimism on a crash because I want to buy a house for my children without needing to learn Mandarin to communicate to neighbours. Yes, optimism. My only concern here is the volume of foreign purchases are actually sustaining the entire Canadian Residental Real Estate Market. Many of the analysts writing the articles here don’t see this because (i) they don’t see the details of each transaction, (ii) foreign money and corrupt development/real estate industry ensure this data will never be aggregated. Instead the analysts here are worried about market analytics with misleading aggregated data on this subject. If you recall from the movie “The Big Short” the guy who made the early call on the US market pulled all the individual mortgage contracts (or had his butch pull them, whose name is forgotten).

      50% of opinion is based on realistic observation of bearish aggregated data as presented in numerous articles on BD.

      I giggled when you put Ontario, market and good news topics in same sentence. You are so silly Mr. Xinping.

    • Raging Ranter 12 months ago

      BD is a blog about the Canadian housing market. Well guess what? Things are an effing mess right now in the Canadian housing market. You want feel-good news about Canadian housing and debt? Wait a decade. Cuz that’s how long it’s going to take to bring this debt bubble down and build a sustainable economy again. What is a sustainable economy? For starters, an economy that doesn’t depend on buying and selling each other inflated boxes using borrowed money.

  • Bluetheimpala 12 months ago

    We made buying real estate a game. Fake income. Illegal down payments. Masking leverage through alternative means. No oversight for numbered corps. Taking money out in a mortgage for renovations or a downplay on another property. Now everyone is trying to game and realizing the music has stopped and there aren’t enough chairs. This will be our Subprime and we won’t know how bad it is until it is really bad because it is all dominoes. Pigs and possums. Tick tock.

  • Mike 12 months ago

    So the HELOCs started to go crazy right around the same time TO/Vancouver RE prices did (late 2016). What was the inciting incident?

    • Em 12 months ago

      Looks like a downpayment Ponzi. One of the links in the article also shows that people were removing “downpayment sized” financing from their homes, around the same time prices were rapidly rising. People are risk blind when they think they can make money very quickly.

    • carlton 12 months ago

      Interest rates dropped to 0.5 is what incited the fools, sorry.. debt slaves

  • Prabhjeev Gambhir 12 months ago

    Hoping that my company, Homeshares, can help alleviate some of the debt burdens by introducing an equity partner. More at Homeshares.co

  • Prabhjeev Gambhir 12 months ago

    Was actually looking to create some discussion around our model and how it affects Canadians but anyway, @admin please feel free to delete my comment if you consider it advertising. Our business isn’t live yet btw.

    • RM 12 months ago

      This blog has a very specific purpose and advertising your business isn’t it. I’d suggest working on your tact and knowing your audience.

      That’s my civil reply… now I’ll just sit back and wait for Bluetheimpala to say what I didn’t.

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