Canada

Congrats! Canadians Just Set A New Record For Borrowing Against Their Homes

Congrats! Canadians Just Set A New Record For Borrowing Against Their Homes

Canadian real estate related debt tapering? That would be ridiculous! Filings obtained from the Office of the Superintendent of Financial Institutions (OSFI) show, after a brief decline in January, the balance of loans secured by residential real estate hit a new high in February. More interesting is the segment of loans being used for personal consumption, is growing at the fastest pace in years.

Securing A Loan With Home Equity

Loans secured by residential real estate are exactly what they sound like. They’re loans that you pledge your home equity in order to secure. The most common example would be a Home Equity Line of Credit (HELOC). You know, the same type of loan the Canadian government is discretely paying to teach you how to borrow. There’s also more productive uses, like when you start a new business and need to use your home as security – just in case you aren’t able to pay your loan shark bank back.

Either way, debt is debt. The big difference to note is a loan secured for personal reasons, is considered non-productive. The borrower isn’t expected to take a calculated risk, in order to earn more money. A business loan is considered productive, since it might generate more money. This isn’t just our opinion, banks actually classify these loans separately in their filings. Today we’ll go through the aggregate of these numbers, then break them down segment by segment.

People Used Over $283 Billion In Home Equity To Secure Loans

Loans secured by real estate hit a new all-time high in February. The total balance of loans secured with real estate racked up to $283.65 billion, up 0.77% from the month before. This represents a 7.79% increase compared to the same month last year. It almost looked like Canadians were reeling that debt in January, with a tiny decline. Instead it made a monster move, more than making up the ground lost the month before. Now, let’s break this down.

Source: Bank Regulatory Filings, OSFI, Better Dwelling.

Over $251 Billion In Homes Are Being Used To Secure Personal Debt

The total of loans secured with residential real estate for non-business purposes spiked in February. The outstanding balance reached $251.64 billion, a 0.77% increase from the month before. This represented a 6.83% climb compared to the same month last year. This brings the total to an all-time high.

Source: Bank Regulatory Filings, OSFI, Better Dwelling.

The rate of growth is definitely something people should be taking note of. The monthly rate of 0.77% is the fastest rate pace since June 2017. The annual rate of 6.83% is the fastest rate of growth since… well, since banks started reporting these numbers on their balance sheets. Apparently higher rates aren’t slowing borrowers down.

Source: Bank Regulatory Filings, OSFI, Better Dwelling.

Over $32 Billion In Homes Are Being Used To Secure Business Debt

Business loans secured with residential real estate also saw a rise in February. Just over $32 billion in business loans were secured with homes, up 0.86% from the month before. This represents a 15.96% increase from last year. These more “productive” loans, are not at an all-time high. Totes disappointing, we know.

Source: Bank Regulatory Filings, OSFI, Better Dwelling.

The takeaway here is the decline in growth. This is the fourth month we’ve seen the annual trend taper, bringing it to the lowest levels since December 2016. A decline in debt growth is typically seen as good, but we get mixed feelings when business borrowing slows.

Source: Bank Regulatory Filings, OSFI, Better Dwelling.

If you’re going to have debt, it might as well be for productive reasons. Unfortunately, residential real estate being used for personal consumption is reaching the fastest pace of growth in years. Meanwhile the segment being used for business purposes, is seeing growth decline rapidly. That next rate hike is going to be rough.

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30 Comments

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  • Reply
    Ahmed 3 months ago

    That rate hike is going to hurt.

    • Reply
      glm 3 months ago

      they are saying that the interests are expected not to go up today

      • Reply
        Sammy 3 months ago

        NAFTA. You don’t want to be labeled a currency manipulator by the US, by letting inflation get out of control to devalue our debts. If we don’t get a hike today, we’ll get one soon enough.

    • Reply
      Moller 3 months ago

      What rate hike?

      Bank of Canada just announced that the interest rate will remain unchanged…
      https://www.thestar.com/business/economy/2018/04/18/bank-of-canada-to-make-interest-rate-announcement-wednesday.html

      • Reply
        Grizzly Gus 3 months ago

        Well I guess that means that rates will never go up!

        • Reply
          Everyone Is An Expert 3 months ago

          I guess Canadian real estate “always” goes up.
          and the interest rates “never” go up aswell.

        • Reply
          Moller 3 months ago

          Well… according to this article https://betterdwelling.com/bank-of-canada-half-of-canadian-real-estate-mortgages-will-renew-by-next-year/ , “[o]ver the next year, 47% of mortgage holders will need to renew their mortgages…”

          Poloz is trying get everyone to renew their mortgages at the lowest rate possible and delay any rate increases. Expect the government to kick the housing crisis further down the road and keep inflating the gasbag (so as to not adversely affect the Canadian economy). Real estate values will continue to trend upwards – our economic activity relies too much on it.

          • Grizzly Gus 3 months ago

            I agree that could be the strategy. If oil ticks up then that could strengthen our dollar and reduce some of the need to hike. That being said, the cost of holding back rate hikes while the US continues to tick up and up could mean a shock to our dollar (big drop in value) which then would require faster and more consecutive raises to prevent inflation from taking off.

            In regards to our economy being too dependent on RE. It is very true, but it’s not something the government can keep going and going indefinitely as much as they would like to. In a command economy you could order the continuous over capacity of certain sectors, like continuously building housing until you have a bunch of ghost cities, but unless you are going to just tear those down and rebuild even this will reach its limits at some point. Will reach those limits much faster if debt and the need for profits are included in the equation.

            But who knows, maybe we will get to the point where all Canadians own three to four properties each, we are all worth 30 million dollars, and the value of our dollar hasn’t fallen to pennies!

          • Sam 3 months ago

            You might be right, but the banks aren’t stupid! If the banks think along the same lines, expect the gap between fixed rate and variable to grow.

        • Reply
          xelan 3 months ago

          Grizzly, If we can perform independent monetary policy that could be possible.

          What bothers me is that looks like US economy is running on all cylinders with record low unemployment of 4.1%. At the same time US announced huge spending (deficits) and also enormous tax cuts. Both of those are designed to add more fuel to the fire and increase growth even further. As a result it should significantly boost inflation over there (which will cause more rate hikes).

          US businesses may have more money on hand now, but they just don’t have employees to hire for business expansion because unemployment is already at rock bottom level. Will they start competing for those employees and offer higher wages which will lead to inflation? Definitely worth to watch wage growth data.

          I don’t know how independent BoC can be in their decisions from US but I haven’t found anything about US economy or US rate hikes in the BoC meeting notes from today so looks like “officially” we are pretty independent.

          P.S. see how we changed sides here?:) Nah, we both don’t know for sure but would be interested to find the truth.

          • Mmr 3 months ago

            I kind of predicted that bank of Canada not going to do something that will crash housing market or more correction. They will allow most of us to lock in with low interest rate and renew for another 5 year. I will be surprised if it went up my more then 25 points .25 by end of year which won’t have any impact any way. And nafta seems to be going well as it seems they will not fall throug. Life goes on as usual. Which I think we all want stability.

          • Foxxy 3 months ago

            Mmr – I’m not sure how possible that is. The US is already at 1.75 and they are predicted to raise to 2 in Q2 of 2018. Can Canada really afford to lag 2-3 points behind for a whole year? I know we often forget that there are any other economic drivers beyond RE but unless we do something soon inflation is about to get a lot hotter.

          • Mmr 3 months ago

            We might not but bank of Canada giving existing home owners plenty of time to lock in with low rate. And almost 50 percent morgage renewal suppose take place all those ppl will be able to renew at still very low rate. Most of those ppl actually borrow even higher 5 years ago so stress test will have low or zero impact with exisiting home owners. I expect bank of Canada will wait as long as they can to see where inflation goes. If it’s really going up they might pull the trigger in July or September but that just .25 or worst maybe .50 by end of year.

          • xelan 3 months ago

            Mmr, why you are providing false information?
            Since 2013 5 years fixed mortgage rate just briefly exceeded 3% in 2013 and was always lower than 3% after that time except recently.
            http://www.mtgitright.com/siteimages/Graph_-_Variable_vs_Fixed_rate_over_time.JPG
            Most of the people will renew at a higher rate this year with the stress test on top of that if they change the lender.

            Actually my friend is renewing now. He has 5 year fixed signed in May 2013 and his rate is 2.89%. Now the lowest rate he can get for principal residence is 3.19% and since is actually an income property the lowest is 3.49%.

          • Reaper 3 months ago

            You mean the fictitiious economy down south ? Don’t worry when the stock bubble bursts in the US and the crap hits the fan they will be dropping rates back 0 % and re introduce QE.
            If they left them at 0% they would have no room to go but negative like most of Europe which is in shambles

      • Reply
        Tommy 3 months ago

        There is still time this year for hikes to be announced.

        The scheduled announcement dates for 2018 are as follows:

        Wednesday, January 17*
        Wednesday, March 7
        Wednesday, April 18*
        Wednesday, May 30
        Wednesday, July 11*
        Wednesday, September 5
        Wednesday, October 24*
        Wednesday, December 5

        • Reply
          Mmr 3 months ago

          Your feiend got a good deal in 2013 it’s was almost same or higher back then. Plus price then was half so stress test will have zero impact even they change lenders. Not just that all these ppl there outstanding loan also decreased in 5 year. And top of that if you stay with same lender stress test don’t even matter. So nothing will happen that’s my point to any one who is renewing.

        • Reply
          Mmr 3 months ago

          YES interest rate might go up and they have lot of window but every one will lock in now and more they delay less impact it will have in market. I know two of my friends just lock in 5 year more. Every one whose morgage was up for renewal are locking now. Earliest and if that’s very big if bank of Canada increase rate by market .25 percent that will be in July or September.

  • Reply
    Met 3 months ago

    Is there any way to figure out if these loans are being used for down payments? I feel like this would explain where everyone is getting a massive downpayment.

    • Reply
      Alistair McLaughlin 3 months ago

      Not everyone, but definitely explains where some are getting it. I can imagine many scenarios where a young couple is looking to buy. One set of parents who is quite well off offers up a down payment, contingent on the in-laws kick in a matching amount. The other set of parents aren’t nearly so well off, but do they really want to be in the position to deny their child a home of his/her own? Especially when the other parents are so willing to pony up $150K? So they borrow against their home equity.

      I have no idea how common the above scenario is, but I bet it is a fairly frequent occurrence. Having to say “no” and thus deny your child the down payment from the other set of parents would be a heart wrenching choice to make. And it might also create animosity in your kids marriage. How fun this real estate mania is!

  • Reply
    Mmr 3 months ago

    We should throw a street party for this great achievement.

    • Reply
      Everyone Is An Expert 3 months ago

      Mmr,

      to celebrate the great achievement, lets get another loan from the bank to make this happen. Interest rates are low. and if we cannot pay the money back, fuck it, the taxpayers will bail us out anyway.

  • Reply
    Grizzly Gus 3 months ago

    Borrowing from Peter to pay Paul

  • Reply
    Bob 3 months ago

    The % jump from 2014 doesn’t seem high compared to the jump in property values since them.

  • Reply
    xelan 3 months ago

    Moody just downgraded Ontario to negative outlook:
    http://business.financialpost.com/news/economy/ontario-government-financial-outlook-changed-to-negative-moodys
    Last year it downgraded credit ratings for all ours 6 major banks.

    • Reply
      Mmr 3 months ago

      Yes they also give aaa to all the junk bond in 2007 before Finacial meltdown. These rating agencies have zero credibility. All you have to do throw some money to them you will get excellent rating.

  • Reply
    Tommy 3 months ago

    Let’s hope this leads to bargain basement home prices in a couple years.

    • Reply
      Alistair McLaughlin 3 months ago

      If it does, it will also mean a bargain basement economy and jobs market. That doesn’t mean it won’t happen. I think it will at some point. But I’m not looking forward to it, much as I think it needs to happen.

  • Reply
    Xelan 3 months ago

    I’m surprised we don’t hear anything in the news about King City (GTA).
    Pricewise it’s kind of holding up but it’s in a full blown panic mode right now:
    Currently listed on the market: 269 properties
    Sold within the last month: 21
    That’s a whooping 13 months of inventory.
    Many developers are now trying to sell their land around King City, you can easily find their listings.

    Since it’s the most expensive city in GTA it’s going to be hurt the most.
    I advice everyone to watch what happens with the King City’s prices in the coming months due such high inventory.
    It will show us what would happen to Toronto or any other city if inventory grows significantly.
    Here are the stats for King City:
    https://www.zolo.ca/king-real-estate/trends

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