Canada

Loans Against Canadian Real Estate Rocket To A New High

Loans Against Canadian Real Estate Rocket To A New High

Canadian real estate values soared, and have people scrambling to borrow against that value. Filings from Office of the Superintendent of Financial Institutions (OSFI) show that the total dollar value of loans secured by residential real estate reached an all-time high. This may be problematic in the personal loan segment, where the rate of growth has also hit an all-time high, at a time when interest rates are starting to climb.

Loans Secured By Canadian Real Estate

Loans secured by real estate are any loan where someone provides their home equity as a back up, if they can’t pay the lender back. These include Home Equity Line of Credits (HELOCs), or any other second mortgage product. They’re becoming very common in Canada, but aren’t without risk. Failing to pay back the loan, puts your own home equity at risk.

Banks break down these loans into two categories, business and non-business. Business loans secured by residential real estate have always been a normal thing. Many new businesses don’t have a credit history, so the owner often pledges their home in the event of default. This is that “good debt” people are always talking about. They’re borrowing in order to potentially make more money. This is in contrast to non-business purposes, which could be for any reason from financing a new kitchen, to providing the kids with a down payment for their very own condo.

Loans For Business Purposes Rise Over $9 Billion

Loans secured with residential real estate for business is posting double digit gains. The total balance was $32.518 billion in November, a 1.61% increase from the month before. That works out to a 38.6% increase compared to the same month last year. To put that in dollar terms, the balance rose $516 million over one month, and $9.052 billion from the year before. That’s huge growth, but the total dollar value is no where near personal loans.

Source: OSFI, Better Dwelling.

Personal Loans Secured With Homes Rises $15 Billion

Loans secured for non-business purposes hit a new record for growth. The total balance is  $250.37 billion as of November, a 0.35% increase from the month before. That brings the 12 month gain to 6.4%, the largest annual gain in recent history. To put these in dollar terms, the balances grew $877 million from the month before, and a total of $15.072 billion more compared to the year before. Is this peak growth? Probably not, but it is the highest it’s ever been.

Source: OSFI, Better Dwelling.

Sometimes when we use giant numbers like this, they tend to lose all meaning. To give a sense of scale, $15.072 billion is a little larger than the average of two months of real estate sales across Greater Toronto in 2017. It’s also the same size as 6% of sales across Canada through the MLS in 2017. Saying it’s just a large amount of money is a bit of an understatement.

Borrowing against a home is becoming increasingly popular. Record low interest rates, and rising home values made it a low risk borrowing option for many. When borrowers start taking out down payment sized loans it becomes increasingly difficult to pay them back. Especially against a backdrop of rising rates.

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34 Comments

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  • Reply
    Ahmed 7 months ago

    Most people aren’t going to understand why this is such an issue, and you only tip toed around the issue Dan. People are taking out HELOCs to buy homes for their kids. This leaves the borrower with less equity, artificially drives prices higher, and gives double exposure to real estate prices.

    Over 25,000 people borrowed HELOCS that were 10% or more of the value of their home in just Toronto, in 2016. What do you think they did with that money? Sent prices higher. This leaves them EXTREMELY vulnerable if prices correct more than 10%. This is going to be a crap show.

    • Reply
      bluetheimpala 7 months ago

      Ding ding ding…Gagnon. Hit that on the head Ahmed. Keep up the great posts.

    • Reply
      Alistair McLaughlin 7 months ago

      Thus Bluetheimpala’s technical term ‘double-dicked’ to describe what will happen when real estate corrects. Those parents who borrowed against their homes to buy their kids’ homes will be taking it from both ends.

  • Reply
    David Z. 7 months ago

    Any idea how this will be impacted by the new B-20 rules? I heard they regulate HELOC borrowing, but haven’t read any breakdowns on the rules. Thanks in advance.

    • Reply
      bluetheimpala 7 months ago

      Good question…would seem like an oversight to crack down on mortgage lending but let HELOCs go unabated or that’s just going to become another bubble.

  • Reply
    Party on 7 months ago

    The borrowing and spending binge by Canadian households, businesses and governments (all levels) continues unabated. Growing the debt in the economy significantly faster than the economy itself grows seems to have developed into a way of life in Canada.

    Canadian total (household, business, and all levels of government) debt numbers as of the end of September, 2017

    https://owecanada.blogspot.ca/2017/12/canadian-total-household-business-and.html

    • Reply
      C 7 months ago

      I really hope that blog post you provided the link to is wrong. That amount of debt is terrifying.

  • Reply
    Trader Jim 7 months ago

    This is bad. This doesn’t even include private lenders, which apparently have a booming HELOC business. Also just before rate hikes.

    • Reply
      bluetheimpala 7 months ago

      I was thinking the same. More so in Vancouver where I’ve read shadow lending is a huge unknown factor. I have a personal experience with alt-lending. I knew a guy about 2.5 years ago, a work friend of a friend. He was gloating at how much money he was making on the side lending within his community because a lot of people were shut out. Him and around a dozen others pooled everything they had and started their own ‘bank’ as he put it. He wasn’t just referring to small loans, under $20,000, he was lending mortgage amounts and everyone was leveraging their homes and other businesses so they could lend out at a much higher rate. He mentioned house flipping specifically as a driver. It was like a crystal ball.

      • Reply
        Alistair McLaughlin 7 months ago

        They refer to such lending arrangements as “syndicated mortgages” I call them time bombs.

        The loans themselves are extremely high risk. Now add the fact that many people borrowed against their homes to “invest” in these things so they could benefit from the interest rate spread. Using leverage to provide high risk borrowers with leverage. What could possibly go wrong?

  • Reply
    Jungle 7 months ago

    What’s very concerning was a report last summer that 41% of HELOC owners don’t make any regular payment.. because these are open loans, you can just withdraw cash and use the same money to service the payment. Voila! Use HELOC as ATM machine to finance things you can’t buy. Likely the property went up in Toronto and Van, banks more than happy to re-finance some more credit when you run out 🙂

    Anyway, there was concern about why the bankruptcy and delinquency rates are historically very low.. well, most likely it’s being hidden with HELOC debt.

    • Reply
      bluetheimpala 7 months ago

      Yup. When you’re stretched thin and life happens you either suffer or use credit. Or you’re an idiot and used your house to buy a car because YOLO.
      Good insight on the record low bankruptcies.

  • Reply
    John 7 months ago

    The numbers need more explaining.

    Canadian banks have been pushing collateral mortgages for nearly a decade. Does OSFI only look at the value of the loan taken against a property, or have they looked specifically at the outstanding (used) debt from the collateral mortgage (and HELOC).

    My suspicion is this metric is nowhere near as bad as it’s portrayed. I don’t think anyone outside the lender can view the outstanding debt from a HELOC or collateral mortgage.

    • Reply
      C 7 months ago

      I get what you are saying, just because i have access to a 50000.00 heloc doesnt mean i have used the debt. But Considering that Stats Can was nosing around my credit report in October 2017, I would assume that the government is acutely aware of debt values, and those values are based on fact and not your suspicions.

    • Reply
      MH 7 months ago

      There is no need to suspect. Reading will do:

      “Statistics Canada said Thursday that household credit market debt as a proportion of household disposable income increased to 171.1 per cent, up from 170.1 per cent in the second quarter. That means there was $1.71 in credit market debt, which includes consumer credit and mortgage and non-mortgage loans, for every dollar of household disposable income.”

      https://www.thestar.com/business/economy/2017/12/14/canadas-debt-to-household-income-ratio-rises-to-171-per-cent-statcan-says.html

    • Reply
      John 7 months ago

      I don’t think that clarifies the numbers MH.

      The terms of lending are private between the lender and borrower on a collateral mortgage because of how it is secured. This is what makes it so expensive to move from one bank to another.

      That being said, the only number reported to other financial institutions from a collateral mortgage is the original mortgage price, regardless of how much has been paid down.

      It would be great if Better Dwelling had a chance to weigh in on this one from what they see in the raw data.

      • Reply
        MH 7 months ago

        Maybe there is a specific reason that I am missing to look into this particular metric. In the end you would want to see an aggregate number that shows you how all the parts come together. The household debt level is a standard measure for this, and here is a chart showing where Canada stands in comparison with other countries:

        http://m.huffingtonpost.ca/2017/11/23/canadians-household-debt-tops-all-other-countries-in-oecd-report_a_23286624/

        • Reply
          John 7 months ago

          We have the data presented and it is what it is. You’re right in that you’d want aggregate data.

          The key you’re missing is for every household with a collateral mortgage, there are two values of which only 1 could be used in this analysis.
          1. The full value of mortgage charged against your name.
          2. The outstanding balance of the mortgage charge.

          This is hugely important to differentiate because scenario 1. the current charge, or current outstanding loan debt will ALWAYS be lower than the original mortgage charge.

          Further, I think scenario 1 is most likely because for ANY institution to run a credit check on you they will only see the original value of the collateral mortgage charge. Noting Further, this could be in excess of 125% of the original purchase price.

          • MH 7 months ago

            I see. Yes, it would be something interesting to look at… though given things like the proliferation of private lending I would be surprised if it uncovers many reasons for celebration.

  • Reply
    Jungle 7 months ago

    If you’re wondering why bank stocks keep going up after rate hikes, it’s because all these loans are adjustable rate which the bank is quick to jack up the rate to rake in more profit of the spread of borrowing. And trump tax cuts are helping too 🙂

    Long banks anyone?

  • Reply
    Lessdenadalla 7 months ago

    Let’s not forget that if house value declines bank can call upon secured HELOC at any given time …

  • Reply
    Investor 7 months ago

    I have little or no concerns for those who borrowed the loans for business use and even those who borrowed to help their children with a downpayment (provided there’s a strategy in place to service or pay it back).

    If the loan was taken out to finance consumer items without a plan to quickly pay it back, then, we’re looking at an issue that could have a snowball effect even if there’s a slight inconvenience in the market.

  • Reply
    CJ Ray 7 months ago

    Realistic scenario: Mom and Dad own a $1,000,000 home and they lent $200,000 to their child in early 2017. Their house is now worth $800,000 and their child’s new home is also now worth $800,000. No problem here!

    • Reply
      C 7 months ago

      Borrowing money to be able to qualify to borrow more money means you are broke and a dumb ass all at the same time.

      Yeah no problems there…..

    • Reply
      bluetheimpala 7 months ago

      While I appreciate the optimism my friend what you’re missing is the perceived vs actual value and when those diverge that is a problem. Here’s my rant:
      The $1,000,000 house in question was only worth $500,000 2 years ago. Way to go mom and dad, time to finally have a retirement after losing it all in the recession. $200,000 down? ok I’ll bite. So the kiddies, I assume between 30-40 years old, have a mortgage of $800,000…I don’t have time to calc the monthly but I can say ‘that shits cray’ and they are both working two jobs, selling organs, eating cat food whatever OR they are both money making machines are can easily carry around $5000 a month in mortgage payments + life + saving + fun. Any major issues or purchases get tossed to the credit card or HELCO but as long as they can hold on, that house in Mississauga will be worth $1.2-1.5 in a few years right? Gotta go up.
      Wait, turns out that mom’s house wasn’t as dope as you remember and no one is putting a premium on a broken sauna from the 90s that you used to hotbox as a teenage. Colours are old. No granite. Smells like death and old man. Pink carpeting (yuck!) Shit, turns out the house was probably worth only $900,000. No biggie that is still a huge gain right?
      The market corrects 20% over a 12-24 month period. Kids house drops and puts them almost under water. parent will only get in the $700s for their place. Minus the $200K and now they are left with $500K. It should be $1M of pure cash…wait, you noted ‘early 2017’, shit son peak was April and the house is already worth $50,000 less. I’ll play nice and not ding you on that.

      TLDR; propping up a bubble by sucking money out of future generations is never a good thing. Using current ‘scenarios’ as a way to rationalize the market is like using a dog to explain what a cat is. Think about it….thiiiink about it.

    • Reply
      Beh 7 months ago

      That’s a good realistic scenario CJ and here’s the problem if mom & dad and the kid live in the GTA:

      1 – Mom & Dad’s detached home is now worth $800k based on the 20% drop in the average price of detached homes… realistically the drop could have been even more.

      2 – Assuming the kid used that $200 as the 20% a down payment on $1M detached home, the kid’s house is now also worth $800k and he or she is underwater, so mom & dad will never see that $200k.

      3 – So mom & dad have lost $400k in equity, the kid’s got not equity but more importantly neither of them have any liquidity, meaning this is where the real problem starts:

      A) If the kid’s forced to sell because he’s under water or for any other reason, mom & dad who have probably co-signed will lose another $80-120k of their equity by the time they list and sell in a falling market.

      B) The banks have the right (little known fact) under any HELOC agreement to call the loan in at any time for any reason. That means even if mom & dad are making their HELOC payments, if the bank calls it in because poo is hitting the fan, they will also be forced to sell their home and take another $80-$120k loss in equity in a falling market.

      So once you add it all up, you can see what the problem is… kid’s broke, mom & dad have lost their retirement savings and neither of them has a home!

  • Reply
    CJ Ray 7 months ago

    Assuming the child bought a $1,000,000 home in the above scenario

  • Reply
    Brian 7 months ago

    The Canadian dollar will decline in value against other currencies which will make Canadian real estate more affordable and attractive to foreign buyers who will buy the real estate Canadians are priced out of affording then rent those properties back to Canadians.

    • Reply
      MH 7 months ago

      Since you brought up the topic of Canadian dollar, here is a something to consider.

      There is a not so little army of foreign specs holding housing stock in Canada. As CAD takes a more-than-likely nosedive along with the RE prices there will be very few reasons for them to keep holding onto their properties. It’s been said before and worth reiterating, the assumption that foreign money will always act as a force driving prices up is naive. Foreign speculators is an amplifying force. It will amplify any trend regardless of its direction.

  • Reply
    Justin Thyme 7 months ago

    Thirty years ago the Bank of Mom and Dad operated a bit differently.

    Then it was called an inheritance.

    Mom and Dad died off, leaving their estate to their kids. Now, Mom and Dad are living longer, and the inheritance money is being postponed until the KIDS are ready for retirement.

    So Mom and Dad take out loans on their equity to give their kids a living inheritance, payable when Mom and Dad finally kick the bucket. As, eventually, they will.

    The retirement portfolio of the kids is the mortgage life insurance the parents took out on the LOC.

  • Reply
    watchdog 7 months ago

    Don’t forget the home prices you’re talking about are in nominal terms, not considering inflation.
    I analyzed the last 28 years of home price data in Calgary and it shows detached home gained merely 6% in terms of gold (median home price / price of gold) over almost 30 years because of increase in money supply which has been accelerating since 2008.

    I’m paying $1400/month for a detached home in Calgary and more than 50% of my savings are in physical gold (I use a Goldmoney vault in Toronto) which has been rallying due to money supply increase by central banks around the world. When the housing market corrects next time and recession follows, BoC will print more money to inject liquidity to the market and further devalue the fiat currency. Only when the home value declines to reach about 230 oz. of gold, I’ll consider taking a loan against my gold holdings for a down payment.

  • Reply
    watchdog 7 months ago

    That’s $1400/month for rent

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