Canada

Canadians Withdraw Another $2 Billion In Home Equity Over A Month

Canadians can’t stop withdrawing their home equity. An analysis of filings from the Office of the Superintendent of Financial Institutions (OSFI) show the balance of loans secured by residential real estate hit a new record in June. The outstanding balance was primarily driven by consumer loans such as HELOCs. Meanwhile, business consumers are rapidly deleveraging from these types of loans.

Loans Secured By Residential Real Estate

Loans secured by residential real estate come in 2 flavors, business and personal. Loans secured by residential real estate for business purposes are pretty routine. Often when a new small business needs a loan, they have insufficient collateral to pledge. The owner will often put up their home as security, just in case the business defaults on the loan. Growth here is generally considered good, because it’s for a productive purpose. These people are borrowing to expand their business, and make more money. This is a sign of confidence in the economy, and we would like to see growth here.

Loans secured by residential real estate for non-business purposes is not so great. These are personal loans used to finance non-productive investments (like a new kitchen). The vast majority of these are home equity lines of credit (HELOCs), that allow homes to be used like an ATM. Since these are mostly used for consumption, seeing growth in this segment can be bad. In addition to borrowing from income growth, problems can occur after a quick rise in prices. Any correction can leave these homeowners with less equity than they planned. We don’t want to see huge growth here, unless you’re selling HELOCs.

Canadians Now Owe Over $286 Billion Secured By Real Estate

First, let’s look at the combined balance of both segments. The total of all segments of loans secured by residential real estate hit a new high. The outstanding balance reached $286.81 billion in June, up $1.966 billion from the month before. This represents growth of 1.83% from the same time last year, which is relatively low for the past few years. The last we saw the annual growth rate fall this low was September 2016. Now, let’s see where the growth is coming from.

Total Loans Secured With Residential Real Estate

The total of personal and business loans, secured with residential real estate.

Source: Regulatory Filings, Better Dwelling.

Canadians Owe Over $258 Billion In HELOCs

The balance of personal loans secured by residential real estate hit a new record high. The outstanding balance hit $258.97 billion of the total in June, up $2.169 billion from the month before. That brings the annual pace of growth to 5.52%, tapering to the lowest pace of growth since May 2017. Despite being a lowest relative pace of growth, that’s still a lot of HELOCs. Which means there’s a lot of holes in home equity to finance consumer spending.

Personal Loans Secured With Residential Real Estate

The total of personal loans, secured with residential real estate.

Source: Regulatory Filings, Better Dwelling.

Business Loans Secured By Real Estate Fall

Business loans secured by residential real estate made a massive decline. The balance reached $27.84 billion in June, down $203 million from the month before. The annual pace of growth is now in decline, falling a whopping 23.16% from last year. Canadian banks haven’t seen growth levels this low for this segment since March 2013. Shortly afterwards, the Canadian business outlook slowed dramatically last time.

Business Loans Secured With Residential Real Estate

The total of business loans, secured with residential real estate.

Source: Regulatory Filings, Better Dwelling.

The balance of debt isn’t a problem by itself, but how the debt is being used might be. Households are drawing on home equity quickly, after a quick rise in prices were followed by a drop in sales. This could lead to a price correction, leaving many homes with less equity than expected. Meanwhile, businesses are using less of these loans, a sign of tapering confidence. Declining signs of business confidence and increased consumer debt. All while interest rates are climbing.

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18 Comments

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  • Frank 9 months ago

    Watching Canadians repeat the US during 2006 is hilarious. Everything from the running out of land, to immigration, right down to the surge of HELOCs before the crash.

    Even more unbelievable is your politicians are saying the exact same things.

    • Joe 9 months ago

      I wish there was a way to like comments on here.
      Your right, the similarities are eerie

      • Tim2 9 months ago

        word….instead of boats and seadoos and toys in the driveways….we Cdn’s finance/lease flashy luxury cars, 2-4 in some driveways….lol

        Bling bling =)

  • Ian 9 months ago

    Big picture perspective: Consumer loans are slowing in growth, which was being used to help finance consumer spending. Stat Can reported wholesale inventories hit a new record this morning, especially with household goods like clothing and footwear.

    Since people spend all of their money on servicing real estate debt now, there’s very little to drive consumer growth. The recession is coming fast, look out everyone.

    • Mortgage Guy 9 months ago

      I bet most of the taper has to do with qualifying rates than a decline in wanting to borrow. We’ll see when the government cuts rates as stimulus.

      • MH 9 months ago

        2007 – “Somebody always refinances us”.

        2018 – “We own BOC”.

      • queali 9 months ago

        Mortgage Guy,

        Most of the comments on this blog have been saying that they won’t be able to cut interest rates. Why would they do it again? Is there some reason why they would have to?

  • SUMSKILLZ 9 months ago

    Everyone keeps comparing Canada to the U.S. I don’t get it. We don’t have zero or negative equity bank loans being written. We don’t have “stated income” only loans. We don’t have large scale “loan modification denial” fraud. I don’t think all asset bubbles are the same. Am I wrong?

    • Paul 9 months ago

      SUMSKILLZ,

      We do have fraud and funny stuff. Like if you put more than 35% down you don’t have to have proof of income. And BD reported on a totally messed up case that was heard in court…

      https://betterdwelling.com/city/toronto/court-hears-of-unexplained-millions-from-china-and-toronto-real-estate/

      Note, no intervention from the financial institutions that should be keeping an eye on this.

    • Popeye 9 months ago

      We are creating our own version of a bubble/crash. You’re right no negative equity loans but Canadian borrowers are still borrowing way beyond their means to get the “free cash”. Stated income is a reality here, I’ve had a stated income mortgage in 2016. The other factor that will leave borrowers with a black eye is the private lenders in Canada, they are out of control. I see the similarities all others in this thread mention.

    • Matt 9 months ago

      No negative equity when you just create equity artificially by disconnecting RE prices from fundamentals.

  • Grizzly Gus 9 months ago

    A verse from Canada’s new national anthem

    “Now look at that FOMO that’s the way you do it
    Borrow against all your home equity.
    That ain’t workin’ that’s the way you do it
    Money for nothin’ and PEOPLE for free”

  • Popeye 9 months ago

    Oh the defaults are just around the corner with numbers like these. Many borrowers are going to look for strategic means to get out without losing their shirt. This is going to be a painful fall.

  • Junge 9 months ago

    HELOCs can hide defaults because technically you can just revolve an interest only payment.

    A lot have figured this out: 40% of HELOC owner’s don’t make any payment at all. A concerning number ..but if people have a lot of equity, why not? Many people have over a 1m++ in equity just doing nothing, and may not ever never use it. I guess better put in the economy. Just don’t over do it.

    Very likely HELOCs will be 5% + next year, 2-4 more rate hikes expected. This should excel loan balances, as interest rates start to hurt.

    • Lessdanadalla 9 months ago

      That logic got masses into astonishingly stupid financial behavior. Repeat after me … HELOC is debt! Part you’re forgetting to mention is that HELOC’s are demand loans, as soon as equity starts shrinking bank can and will call a full repayment … not potion of it, not half but full outstanding balance. If s**t really hits the fan and road signs are pointing that way, people will be losing their home because that 100k HELOC they’ve been smashin’ for granite countertops, stainless steel appliances and wicked cool vacations …

  • TJN 9 months ago

    Self employed and small businesses have a hard time gaining funds at our national banks. They are penalized heavily and it benefits the banks, not Canadians. Heloc’s help these hard working people, and these hard working people employ most of Canada.

    97% of the population…and we still operate at the banks on a 2 week pay period standard, credit still on that standard. Shame, Shame, shame for making the barriers so high for Canadians to grow their companies, innovate and employ people and this dampens growth.

    The latest published results:
    As of December 2015, there were 1.17 million employer businesses in Canada, as shown in Table 1.1-1. Of these, 1.14 million (97.9 percent) businesses were small businesses, 21,415 (1.8 percent) were medium-sized businesses and 2,933 (0.3 percent) were large enterprises Banks and Insurance companies mostly).

    SHOP LOCAL FOLKS.

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