Canadian real estate prices were on a tear in 2016, and an increasing numbers of homeowners borrowed against that rise. Numbers from Equifax and the Canada Mortgage and Housing Corporation (CMHC) show an increase in multi-mortgage issuance in Canada’s fastest growing markets. That is, the number of people getting a second, third, or fourth mortgage on an already mortgaged residential homes, is on the rise. This could provide increasing evidence that the “bank of mom and dad” poured gas on last year’s buying frenzy.
Source: Equifax, CMHC.
Multiple Mortgage Holders
Multiple mortgage holders are just what they sound like. It’s when people attach more than one mortgage to the same address. In order to qualify for this prestigious honor, your home needs to have more than one mortgage on the property. To reduce skew from refinancing, the balance of that mortgage has to increase by at least 10%. These are homes where the owner rolled back the amount of equity they had. Either by borrowing more money against the home, or devaluation. The latter isn’t very likely in the time frame in cities like Toronto and Vancouver.
Source: Equifax, CMHC.
Toronto Real Estate
Toronto had large growth compared to most of Canada, just not BC cities. In 2016, 26,534 new homes applied for an additional mortgage, a 2.7% increase from the year before. The average debt from these borrowers is now $303,734, a 11.6% increase from the year before. The growth in the number of multiple mortgages doesn’t seem all that large. The amount additional mortgages is rising substantially, as is the size of these loans.
Note: Toronto didn’t see prices really spike until the last quarter of 2017, and the first half of 2017.
Vancouver Real Estate
Vancouver experienced huge growth. In 2016, 13,573 new mortgages to issues with homes with existing mortgages, a 25.4% increase from the year before. The average debt for these loans was $389,595 in 2016, a 15.8% increase from the year before. Here we got huge growth in both the number of mortgages on already mortgages homes, and the size of those loans. Actually, the increase of loans is so large, it makes Toronto’s growth seem like peanuts.
Montreal Real Estate
Homeowners in Montreal are taking less aggressive steps to use their home equity. In 2016, 17,532 new mortgages were issued to homes with existing mortgages, a 0.7% decline from the year before. The average balance on these homes stood at $167,092, a 3.0% increase from the year before. Here we get a decline in the number of loans, and the balance of the mortgage is almost half of what it is in Toronto.
People borrow against their home equity for various reasons, from emergency funds to sending their kids through school. The amount of money borrowed to qualify for this number is interesting, however. The mortgages would have had to increase by at least 10%, which makes it the perfect amount for another downpayment. These mortgages also showed the largest growth in BC cities, where prices went parabolic in 2016. It’ll be interesting to see if Toronto’s numbers soar in 2017, when prices decided to make their own parabolic move, in the first half of the year.
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Great data point. People are coming up with every reason for rapidly rising home prices, but everyone is trying to rule out speculation. Maximum growth was in the suburbs of Toronto and Vancouver, right before the spike in 2017. Foreign buyers didn’t descend on Kelowna and Niagara. A lot of people took out an additional mortgages the size of a downpayment though.
Foreign buyers absolutely have descended upon the Niagara suburbs-and no surprisehome values have skyrocketed.
And local homeowners have borrowed heavily against their 60 year old bungalows, now on average selling for about 400000.00.
Here is just one of many St. Catharines Real Estate Agents “specializing” in Real Estate and their “international” clients……..
True story–my sister in law bought her North end St. Catharines home 30 years ago for
$135 000.00. She currently owes over $200 000.00–but she will happily tell you her home is worth half a million dollars.
Foreign speculators and debt hungry homeowners are absolutely to blame for this mess. Please readers, don’t believe anyone when they tell you that this isn’t speculation. St. Catharines home values skyrocketed right around 2015, when the Asian stock markets started to tank–and every Chinese Real Estate Agent-who could afford a billboard or a bus stop bench came out of the woodwork.
Nice try though. Nothing racist or x
Don’t forget that a lot of these foreign buyers are flipping due to local beliefs that prices just keep going up. Agents that specialize in this, often do it because they get the buy, and the sell back to a local. Nab a foreign buyer, you get the hold for a few months, and a guaranteed sell afterwards.
It’s not just asian real estate agents doing this either. Firms with loads of old white dudes go over to China, and pitch them like for term holdings.
Great article. If these are being used for down payments, it’s game over in the event of a correction. These people are double exposing themselves, and introducing a dangerous amount of leverage into the system. I know you won’t be able to track these through to down payments of related parties, but the government really should be looking into this.
Right now you have two options, you can borrow from your parents to buy a down-payment, or never buy. Prices are rising so quickly, if you don’t own something, you won’t be able to make up the portion of your net-worth in the future.
Kudos to these parents, you should help your kids with their down-payments whenever possible. Otherwise you’ll have to deal with your kid moving in with you later in life.
Another buy now or buy never mentality.
You are knowingly looking down the barrel of a gun and shrugging your shoulders as though ‘it is what it is’. Inter-generational wealth transfers to prop up an unsustainable housing market is pulling future $$$ forward to then get stripped as the economics normalize. it isn’t an endless supply of money! If Mom and Dad just kept their money in the first place, we wouldn’t be in the mess we are. TO would be like NYC but those who don’t want to be in the city could have a nice affordable life in the burbs. Want a little nice, Hoboken. Now a piece of shit detached in Mississauaga is going for $850. You want some updates so it doesn’t look like the 90s $1.1+. People are buying house for $600 and relisting a month later with a coat of paint for $800 and people are buying (or were…)
Canada is going to get double-dicked; two cohorts representing 30+ year span are going to lose a large % of their wealth all because we couldn’t be saved from ourselves. The smart money is getting out and waiting will guys like Kelowna Mike lube up.
Bluetheimpala, your reply is pure gold and pure truth. Especially the metaphorical final paragraph.
Great article. It’s not just the bank of mom and dad though, some people are just leveraging up to buy extra homes. Speak to some asset managers, they’ll tell you of the insanity that is their over leveraged Boomer clients.
That’s the point. I am curious if there is a way to calculate the “compound” leverage in the system? I would not be surprised if it makes leverage on margin trading accounts look pedestrian. And those are considered risky… Wen they say that real estate in Canada is fine because it’s not like what it was south the border before crash, it’s laughable. As if there is only one way to clog the system with junk debt…
As always, amazing analysis.
This is the biggest threat to the canadian economy over the next 2-15 years…over-leveraged boomers and what happens when the underlying asset drops in value. If you’re rich, you probably just gave your kids cash or can handle the debt. If you are middle class or lower-middle-class you probably took 50-80% loan from an alternative lender based on an inflated/insane valuation of your house (Price can only go up forever right!)
Any drop over 5-10% will cause panic resulting in a ‘bank run’ situation where there will have to be a mass exodus from the asset to ensure they can cover the debt obligation. As with any mass panic, most people cannot get out and all the buyers will just sit and wait..they gobble up the assets at a discount and wait out the next boom. Rinse and repeat.
Waiting is easier said than done. In practice that waiting game can cost you decades of your life not living in the home of your dreams of in your own home raising a family. How many cycles does a person get to live thru and exploit at discounted rates? Not many…
Fair but nothing suggests this is sustainable. Mild recession. 0.5-1 Interest rate increase. NAFTA. Trump. Stock market dropping after going on what in reality is a 7 year bull run (everyone loves to think 2015 was a recession…oil got hit and gold was already over inflated…there wasn’t a correction).
Any impact to housing, retirement or income in addition to macro factors like interest rates and employment all seem like a swirling mess with one or two combining to mess our shit up.
Hopefully I am wrong and everything just keeps going up. APH to $20 baby!
[…] 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 […]
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