Is Canadian Mortgage Credit Back To Booming, Or Is This Delayed Demand?

Canadian real estate sales are back, but it’s unclear if this is just delayed demand. Bank of Canada (BoC) data shows new mortgage lending made a big jump in July. The rise is less impressive, when compared with the unusually weak performance preceding. Two years ago, the mortgage industry warned policy changes would result in buyer delays. That delay may be over.

Moving Averages

Moving averages are great for filtering noise, and revealing an underlying trend. Today we’re going to be looking at a simple moving average (SMA). It’s a really fancy way of saying we’re adding all of the dollars over a few months, and dividing it by the number of months. In this instance, we’re using a 12-month SMA, so we get a little of every month. By averaging a longer range, we can smooth out the month-to-month changes. This isn’t required with all data, all of the time – but it might be useful here.

For cyclical products, this isn’t always necessary – this often includes real estate. Ask any agent or mortgage broker, and the months generally feel the same every year. For instance, May is usually the biggest month for Canadian real estate sales. January is normally the slowest one. Some Mays are busier, and some Januarys are slower, but the general theme is the same. Recently, that hasn’t been the case, and it might have to do with B-20.

Since B-20 Guidelines required more resilient buyers, the industry predicted a demand delay. People expecting to buy, suddenly faced more stringent requirements for approval. Sure, some people decide to sit the dance out. However, most people would improve their lending prospects. That is, some would delay buying until they had more money. This cohort of delayed buyers, would meet with future demand. The result would be a small spike in demand, which tends to bring in follow on demand as well.

Canadian Mortgage Lending Makes A Big Jump In July

If you’re not factoring in any delayed demand, it looks like we just made a big jump in lending. New lending for mortgages reached $45.85 billion in July, up 11.58% from the month before. When compared to last year, this number is a mind boggling 31.64% higher.

Canadian New Mortgage Lending

The monthly dollar volume for residential mortgage funds advanced by institutional lenders.

Source: Bank of Canada, Better Dwelling.

When looking at growth, the oddity stands out a little more. To someone that’s never seen this pattern, it looks like it made a really big peak in July. Real estate’s back, boyyy. Fire up the overbidding as quickly as possible. However, that ignores the unusually slow growth from Nov 2018 to May 2019. Especially considering the narrative is the economy was booming that whole time.

Canadian New Mortgage Lending Annualized Change

The 12-month change in monthly dollar volume for residential mortgage funds advanced by institutional lenders.

Source: Bank of Canada, Better Dwelling.

The Moving Average Shows A Different Pattern

The 12-month moving average displays a very different pattern for mortgage credit. Funds advanced are $30.62 billion in July, up 3.09% from the month before. This works out to a drop of 1.43% from the year before. Once again, these are 12-month averages, so the actual number doesn’t mean a lot – much like a benchmark price. Instead, it’s the trend that’s revealed that we take information away from.

Canadian New Mortgage Lending – Moving Average

The 12-month simple moving average for monthly dollar volume on residential mortgage funds advanced by institutional lenders.

Source: Bank of Canada, Better Dwelling.

The first thing that’s obvious from the dollar volume, is the big run up in the beginning. This is the big jump in sales that happened from 2015 to 2017, when rates expanded credit. From there, we see mostly flat (possibly lower) movements. Looking at annualized growth on this chart, really emphasizes it.

Canadian New Mortgage Lending – Moving Average Change

The 12-month simple moving average for monthly dollar volume on residential mortgage funds advanced by institutional lenders.

Source: Bank of Canada, Better Dwelling.

Looking at the trend, it’s not clear we’re seeing a true demand surge. There’s a rise in sales compared to last year, but a portion of this is due to policy changes. Policy changes often lead to behavior modification, and this is one of those events even the mortgage industry predicted. The market pressure is very real, but is more likely to flatten out over time naturally.

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