It’s Not “Stress Testing” Canadian Real Estate Buyers, The Credit Cycle Is Breaking Down

Canadians are slowing their borrowing, especially for real estate. Bank of Canada (BoC) numbers show credit growth continued to slow in July. Growth even reached decade low levels for real estate lending. The slowing growth is a major sign that Canada’s credit is entering a down cycle.

Credit Cycles, Lending, and Asset Prices

Hopefully regular readers know the basics of a credit cycle by now, but here’s an intro for you newbies. Credit is determined by borrower risk, which moves with business and real estate. When home prices are rising, credit is easy since the chances of defaulting on a loan are greatly reduced. If a borrower can’t make their payments in a booming market, they can always list and sell before defaulting. The easy access to credit makes it cheap, especially for things like real estate. That’s the basics of the credit up cycle.

When business and real estate fundamentals begin to deteriorate, we enter the down cycle. Lenders are tighter with lending, and cut down on available credit… or their access to cheap credit becomes tighter. This results in higher lending rates, which drop borrowing even further. Once credit tightens, consumption and large asset prices begin to adjust to liquidity. The public isn’t notified until it’s already begun, but there’s some signs to figure out what they’re thinking. If lenders could issue credit, they would. If credit growth slows down, it’s because they don’t have enough qualified demand.

Household Debt Reached Over $2.12 Trillion

Canadian household debt reached a new all-time high, as growth continued to decelerate. The balance of outstanding credit at large lenders reached $2.128 trillion in June, up 4.1% from last year. That’s a big change considering growth was at 5.8% last year. All signs point to growth moving lower as well, as the one-month annualized rate fell to 2.3%. Let’s break that down to see where Canadians are borrowing.

Canadian Household Debt Outstanding

Total debt held by Canadian households, in Canadian dollars.

Source: Bank of Canada, Better Dwelling.

Canadians Owe Over $1.5 Trillion On Residential Real Estate

The Canadian real estate debt binge continued, but at a much slower pace. Outstanding mortgage debt stood at $1.515 trillion in June, up $5.52 billion from the month before. The annual pace of growth fell to 4.1%, the lowest levels since 2001. Since we already discussed what was happening with lending and rates in 2001, we won’t bore you again. Those still curious can take a trip back to Monday’s read.

Canadian Household Debt Change

Annual percent change in debt held by Canadian households.

Source: Bank of Canada, Better Dwelling.

Canadians Owe Over $612 Billion In Consumer Loans

Consumer credit, like the kind you used to finance that blender, reached an all-time high. The balance reached $612.32 billion in June, up $3.73 billion from the month before. This also represented an annual increase of 4.1%, about 35% lower than the same month last year. Totally not interesting, until you realize that the consumer growth rate is falling with mortgage growth. Unless we’re stress testing car and blender loans for higher rates, consumers are tapped out and/or lending is tightening. Either case, the cost of borrowing typically moves higher without an interest rate cut, stemming further demand.

The slowdown of credit growth shouldn’t be a huge surprise to anyone. Household debt has doubled in just over 10 years, playing a large part of the Canadian economy. Home prices across the country have also doubled over roughly the same period. This was driven largely by the easy access to debt. The slowing growth of credit is going to have some fall out, until the credit cycle boots up again. Surely that can’t impact home prices, right?

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  • Torontonain 3 months ago

    I never realized how much the CN Tower looks like a middle finger until today.

    • Werry 3 months ago

      Fun fact, it was built in the 1970s knowing that the city would eat its young, and anyone born after 1980.

  • Mica 3 months ago

    As per Monday’s read, this means a rate hike is in the works, no?

    • Lessdanadalla 3 months ago

      One more hike by the end of the year …

    • Bluetheimpala 3 months ago

      The economy posted better than expected results. they may pull forward to Oct vs Dec but I have to assume, barring anything catastrophic, that we’ll have another this year. Tick tock. BD4L.

  • David 3 months ago

    Repeat after me, Toronto’s problems don’t impact the rest of the country. Oakville was just named the best city in the country in large part due it’s robust real estate market.

    • Mac 3 months ago

      Does Oakville have its own central bank now? Because I imagine they’re not immune to the credit cycle that impacts the WHOLE country.

    • Lessdanadalla 3 months ago

      I heard folks in Richmond Hill, Aurora, Mississauga saying the same thing … “we are special” thing is spreading around GTA like wild fire. When I grow up I want to live in Oakville …

      • SUMSKILLZ 3 months ago

        Many of these ring cities were special until housing development went hog wild and every last forest and farm field got paved over in the last 15 years. The charm is largely gone. Everything looks the same. Crowds are everywhere, the smallness it had is no longer. MoneySense can’t even agree year to year what is best. Corktown Common is looking more and more appealing to this suburban commuter.

    • Bluetheimpala 3 months ago

      I assume you live in Oakville or you work for the rag that just made this claim. You must have some skin in the game (or you are a troll…if so, good on ya!). As money ALWAYS contracts around economic hubs, with Oakville being in between ‘Who the fuck cares’ and ‘Oakville…that place next to Mississauaga?’ it will meet a horrible fate, wore than Mississauaga or Brampton which both, debateably but not incorrect, have lively downtowns with people in the peripheral, youth and overall energy/growth/livliness. Last piece I read about ‘da oak’ was that the downtown is decrepit (massive vacancies, businesses can’t survive) and it is essentially a grave site for rich boomers and is dying a long, slow death…but I’ll take your word for it David! BD4L.

    • @xelan_gta 3 months ago

      Robust RE market indeed.

      • Grizzly Gus 3 months ago

        Haha. But but but, isn’t Oakville the economic engine for the GTA and the rest of Canada?

    • Neo 3 months ago


      Oakville had the same swoon after last Spring everywhere else had and hasn’t gotten out of it yet this year. Getting named best city had little to do with real estate. The parameters changed from last year. Burlington went from the #1 spot the past 5 years to #31. By your logic Milton must have a really impressive Real Estate market since it went from 147 last year to number 6 in the country this year. Oakville went from 14 to 1.

    • Robert Dole 2 months ago

      Except that credit allocation decisions are made from central locations (Toronto). If there is a growing default rate in Ontario you can expect that the Big 6 will pull back on all fronts.

  • Zheng 3 months ago

    10 year government bond is skyrocketing, currently at 2.34. If it breaks past 2.5, we’re at a 5 year high and hell breaks loose. If the government needs to pay more, you’ll pay more, and credit demand will drop very quickly.

    The government doesn’t get to decide rates so much as the free market.

    • Trader Jim 3 months ago

      That’s kind of true, but not really. The government can keep printing bonds and get the BoC to absorb liquidity. There’s huge consequences to the dollar, but they won’t care if it means they need to kickstart lending.

  • Justin Thyme 3 months ago

    ‘Breaking down’ as in ‘broken’, or ‘breaking down’ as in ‘breaking bad’?

    There was no peak in the graph this time, as there was in the last two recessions. This downturn came off of a relatively flat period. The graph from 2010 to today looks nothing like the graph pre-2010.

    Something happened in 2008-2009 that changed the graphs.

    But it is interesting to note that consumer debt was rising until it intersected with the falling mortgage debt, and then they BOTH went down together. That has never happened in the entire reporting history.

    It is obvious that the graph since 2008 has changed fundamentally.

    I have no doubt that we are heading for a crisis. I just don’t think that we can predict exactly what it is going to look like. But I am positive it will be nothing like anything that has happened in modern history. This is not a regular cyclic downturn. It is a completely broken cycle.

    But whatever happens, it will happen in conjunction with the stock market. This is not just about the real estate market, it is about money in general. It.s not about foreign buyers of real estate, or of exuberance in the housing market. It is not about normal real estate cycles of supply and demand. An economy doesn’t climb from nowhere to equal to the world’s largest economy in just 20 years without SOMETHING being shaken up. Everything has shifted about everything in the world economy, and the last ten years or so are just about things settling down.

    But HOW they are going to settle down, we have to go all the way back to America breaking away from Britain and then becoming the dominant economy for a precedent.

  • MH 3 months ago

    So what do you think these huge consequences to the dollar will do to the yields? Just asking…

    • MH 3 months ago

      The question was in response to the comment by Trader Jim.

  • Pat 3 months ago

    How long is a downward credit cycle? Another 10 years?

  • @xelan_gta 3 months ago

    “The End of the Global Housing Boom”
    Very nice article produced by Bloomberg for those who are not aware what’s going on with RE markets around the world.

    It’s a global trend and Canada is one of the most vulnerable countries as per CMHC, IMF, BIS etc.
    Good luck betting against that.

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