Toronto real estate debt has been soaring, but how much other debt do households have? Equifax numbers from the Canada Mortgage and Housing Corporation (CMHC) show that the majority of debt is real estate related, but there’s still a whack of consumer debt. When broken down into payments, consumer debt requires nearly as much cash to service.
About The Numbers
Today’s numbers are from Equifax, and will be a low-ball estimate of household debt. To start, Equifax’s numbers for outstanding mortgage debt is about 20% lower than Bank of Canada (BoC) numbers. Neither include private lending, where the debt is held by anyone from a big company, to mom and pop. That said, these numbers are the most comprehensive ones broken down by region. Just remember that as large as these numbers are, they’re underestimating the total.
Toronto Households Have $384 Billion In Debt
The majority of household debt in Toronto is tied to real estate. Households owe over $384 billion at the end of 2017, the majority of it tied directly to primary mortgages. Mortgage debt accounted for $268 billion of those dollars, about 70% of the total debt. Home equity line of credits (HELOCs) were the second largest segment of debt at $45 billion, a touch over 11.8% of total debt. The majority of debt is tied to assets in a cyclical industry – what could go wrong?
Most debt is related to real estate, but there’s still quite a bit of consumer debt. The largest segment outside of real estate is credit cards, which accounted for $17.98 billion of the debt pile, about 4.7% of total debt. Auto loans added up to $11.96 billion, 3.1% of total debt outstanding. Regular lines of credit represented $8.58 billion, 2.2% of the total debt outstanding. Other, which is an aggregate of all other forms of debt, came in at $31.28 billion, 8.1% of the total debt. The majority of debt might be tied to real estate, but $69.81 billion in consumer debt is nothing to sneeze at.
Greater Toronto Debt By Type
Total debt held by households in Greater Toronto, at the end of the fourth quarter of 2017. In Canadian dollars.
Source: Equifax, CMHC, Better Dwelling.
Toronto Households Pay Over $2.79 Billion Per Month To Service Debt
All of this debt isn’t just a pain on household balance sheets, it requires a huge amount of cash to service. Greater Toronto households are scheduled to pay $2.79 billion per month to service the debt. Households pay $1.52 billion towards mortgages, representing 54.4% of monthly payments. HELOCs need $120 million, representing 4.3% of monthly payments. Real estate related debt is over 80% of total debt, but less than 60% of monthly payments go towards servicing it.
The rest of the monthly scheduled debt servicing goes towards consumer debt. Credit cards need $348.93 million, representing 12.5% of monthly payments. Car payments need $319.32 million, 11.4% of total monthly payments. Line of credits need $122 million, 4.4% of monthly payments. The mystery debt aggregate marked as “other” requires $367 million, the remaining 13.1% of the monthly payments. For those keeping tabs, consumer debt consumes almost half of all cash that goes to debt servicing.
Greater Toronto Scheduled Monthly Payments By Type
Total monthly debt payments scheduled for households in Greater Toronto, at the end of the fourth quarter of 2017. In Canadian dollars.
Source: Equifax, CMHC, Better Dwelling.
Record low interest rates allow people to pay more towards principal borrowed. However, it also results in people taking out more debt than typical. The issue isn’t a huge problem when interest rates are low, but as they normalize, households will start to feel the pinch. The BoC warned earlier this month debt is concentrated by region, and demographic. Households with high levels of debt will be “highly vulnerable” to rising rates.
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That HELOCs are such a tiny percentage of total debt payments is not surprising. We’ve heard again and again that 40% of HELOC holders pay nothing on them, but let them accumulate and eat up equity. (Hopefully their mortgage principle is increasing equity by a greater amount, but with home values no longer rising that seems doubtful.) Another big whack of HELOC debtors pay interest only. The result is that fewer than 30% of HELOC balances are getting paid down each month. More than 70% are either growing or treading water.
From what I’m hearing people are in a bit of a holding pattern as they keep reading bullshit from the media and RE industry about a rebound. The reality is each month is getting worse, not better. Very soon, I expect within 3 months, before the slow winter selling period, there will be a little bit of a freakout…if you can’t sell this year, next spring won’t be any better and if we’re in fact hitting a recession in the next 6-9 months, by that time EVERY home owner aged 55-80 is going to watch their retirement evaporate and some may be insolvent if they can’t service their debt or refinance.
Oh and banks are now rejecting housing valuations and deals are falling apart all over the place. I’ve been part of a deal that has fallen apart twice because the bank has assessed the CONDO, yes CONDO, far below the ‘market value’. Who knew?
BD4L.
Not sure we’ll be in recession in 6-9 months, but I’m convinced we will be within 18-24 months. US is at peak employment now. Every time the unemployment rate gets this extremely low, a recession follows. That relationship goes back to the post-war era. It’s a better predictor than the yield curve. When you’re at the peak, there’s nowhere else to go but down.
Read last week that if you look at recessions since 1950 in the US, recessions started as little as 4 months from lowest unemployment. Given that the yield curve is cratering, and GDP is low, a recession starting in Q4 of this year or Q1 of 2019 is realtistic.
I went to an open house this weekend that had two deals fall through in the pastt week due to bank not willing to finance what the seller is asking…
I didnt put in an offer!
I guarantee that Poloz won’t raise interest rates this month, just to further exacerbate this debt bubble under the guise that the economy is in a goldilocks phase. The fact the 50% of downtown Toronto condos and I’m sure 35% of GTHA condos are bought by investors, most of which now have negative cash flow, will only add fuel to Poloz’s stranglehold on low interest rates. Don’t forget that Canada will keep the floodgates of foreign $$$ wide open to prevent our precious real estate market from crashing. After 6 years of watching the GTHA housing market sky rocket, I just can’t see the government allowing a crash. Pisses me off everyday.
They’ll get a crash eventually whether they want one or not. But I agree it is a piss-off to watch the BoC shirking its responsibilities in order to squeeze out a few extra points of GDP growth. The BoC’s responsibility was never economic growth, it was stability of the monetary base. Period. It only became concerned about growth in the past 10 years, and the term “economic growth” only appeared in its mandate after it was renewed a couple years ago. It has no business being in there. Growth comes from the real economy, not from the monetary authority. The central bank’s ONLY responsibility is to provide a stable monetary base, meaning stable prices.
I hope you’re right AM and in fact, since it takes a quarter to define a recession it is most likely 9+ months away. Anecdotal I know but a friend works for big home builders. Fieldgate and now Mattamy I think (he might’ve moved to a smaller one…can’t recall) …Fieldgate was telling everyone 3-4 months ago there is a slowdown and there will be layoffs this summer. I don’t think we know enough about the shadow banking and what is backing a lot of these loans…if the fringe lending business falls, mark my words the implosion will be accelerated. Sure housing is not liquid but money is; if you’re in arrears and the banks flexes (read: they are feeling the pain) they will take everything you have or a large chunk and let you hobble along. The US financial issues were isolated to the banks; when our wheels fall off the guy next door who was a ‘genius’ in 2014-2017 will be selling lemonade on the corner to stay afloat. BD4L
Layoffs at the builders makes sense, given that some of their recent buyers can no longer come up with the financing to close. You guys are probably sick and tired of me posting this link, but for me it never gets old:
https://www.communityforfairness.ca/our-stories
Funny they stopped updating the site at 12 stories. There must be more than that. I’m guessing the universally unsympathetic reaction they got from both the general public and politicians led them to abandon their sympathy play. When a provincial minister comes right out and tells you, “Sorry, but you’re on your own”, in an election year no less, then you know that your pleas have fallen on deaf ears.
Good insight, Blue. I’ll ask some builders I know as well about staff changes.
Toronto and GTA lead the pack of debt load here. IT is massive and home price and sales are falling the hardest in GTA. Fall 2018 will be a clear-cut indicator on whether the price will stagnate or keep falling for the next few years.
GTA will still end up with its own recession. Too much money spent on rents/mortgages, too much debt, stagnant salaries and falling RE prices. People are not buying stuff when they can’t cover basic expanses.
This whole bubble has already stopped turning quickly and will deflate over time as people realize there is no quick buck to make. Also way too many “investors” in condo market that will rush to the exit.
A localized recession will hit GTA. Too many negatives on the horizon….
Completely unavoidable now. The turnover rate of shops in busy neighborhoods should be a huge warning flag. No one’s eating out, or shopping in the same frequency – and these companies are paying much higher rent. Tourist traps will survive, but local shops are screwed.
No one is eating out, but worse, no restauranteur can afford the lease anymore. This is not unique to the GTA unfortunately. I was in Burlington VT in July 2016. The owner of a small downtown diner was complaining he might have to shut down after more than 40 years. Why? Leases were going through the roof. Why? Developers were buying up old buildings, tearing them down, and building condos. Rich East Coasters and even a few rich Montrealers love the idea of owning a condo overlooking Lake Champlain. Also, their offspring who attend university in Burlington need a nice condo to live in of course. Only po’ people live in dorms and apartments while attending college.
Same thing is happening in Vancouver. Walk a block or two down Robson street from Georgia and every other shop is empty looking to be leased out. On the bright side, homeless people have a great stoop to camp out in!
Has anyone crunched the numbers on this? Population of Toronto is 2.81M. Using 2011 census numbers, 820k detached homes, 550k condos, 620k towns, that’s ~2M households. That’s avg mortgage/heloc combo of $160k. Seeing how avg house value is $740k, there is a lot of equity out there. would take a considerable correction to change these
The easiest way to solve the influx of foreign capital, and keep housing affordable and add much needed revenue in places like Ontario and BC is to impose a luxury property tax of 2-4% of the value of the home. I luxury tax would include anything sold over 1mil. So in essence if you play you have to pay. At 2% all the home sold for over a 1mil would have to pay 20k per year in taxes.
That would solve the problem very quickly.
to Konrad,
Your math is completely wrong and your data is irrelevant.
43 % of Cdn homes have NO mortgage.
Therefore almost double the debt load per house that you quote.
Also, it is not the AVERAGE debt, but rather the distribution and leverage employed of that debt that is relevant.
With all the “shadow banking” money in play out there and ‘borrowed’ down payments, the situation is far more fragile than the ‘average ‘ number would suggest.
The devil is in the details as they say and frankly, these details should scare the crap out of any rational person with even a modicum of critical thinking capacity.
I can buy 10 average GTA houses for cash and I don’t own one now because I can think and reason, unlike the emotional and insecure lemmings that are about to suffer rather badly.
Any house you can show me in the GTA, I can rent the equivalent for much, much cheaper and not have the risk of a major price erosion.
Watch what happens in the not too distant future – you will be amazed, and if you have a big mortgage you will be in tears.