Canadians Just Set A New Record For Borrowing Against Their Homes

Via BetterDwelling.com,

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.

*  *  *

And while the desire of some well-meaning members in government to drive down the price of homes through demand-side policy may sound practical at first blush, The British Columbia Real Estate Association warns the government, be careful what you wish for...

The Economic Fallout of Housing Price Shocks

When you consider the broad and deep economic toll that a negative shock to home prices would exact on both homeowners and renters, it quickly becomes apparent that such an approach is at best, a mug’s game. BCREA Economics analysis shows that even a relatively modest negative price shock will produce significant consequences to the BC economy.

Nearly 70 per cent of British Columbian households own their home. A relatively minor 10 per cent negative shock to home prices would extinguish $90 billion of their wealth, or $70,000 of the average home owner’s equity. While some may see this as a paper loss, it will have a significant impact on the economy, as declining household wealth reins in consumer spending. Retail sales would suffer, with an estimated $1.8 billion in forgone revenue in the first year after the shock.

Home construction activity would fall dramatically. Home builders would cut back production 25 per cent; that’s 10,000 fewer housing starts in the first year alone. A negative price shock would markedly slow the expansion of the housing stock, creating even more critical housing supply problems down the road.

Across the economy, a negative home price shock will slow growth. Tens of thousands of jobs will be forfeited. The unemployment rate will shoot up. A 10 per cent negative price shock will slow real GDP growth to 1.5 per cent from a baseline of 2.7 per cent. That’s $3 billion in lost activity. If home prices fell 35 per cent, a level some activists are championing, the BC economy would collapse into recession. The average home owner would have lost $245,000 in equity, housing starts would fall by half, 64,000 jobs would be forfeited – sending the unemployment rate to 7.5 per cent with $4.4 billion in forgone retail sales and a colossal $8 billion loss to GDP in the first year.

This analysis does not account for the negative impact on provincial tax revenues, expanding deficits, ballooning debt and credit downgrade risks.

Comments

VZ58 Bitchface-KILLAH Sun, 04/22/2018 - 17:11 Permalink

Yup. Can't disagree with that assessment. Most average people got rich in the big cities selling dead parents' places to the Chinese. Now they think they are brilliant business men and vote for social Marxists to save the world of every known blight, so they can assuage their guilty conscience about their huge wasteful over-consumption on shit no one needs. And the rest of the working class are in debt beyone their eyeballs with no hope of ever getting out of the deb spiral because everyone needs an iphone family plan.

In reply to by Bitchface-KILLAH

pitz VZ58 Sun, 04/22/2018 - 17:24 Permalink

Nope.  There is minimal to no Chinese participation in Canada's RE.  Anyone who 'got rich' in Canada's big cities from RE got 'rich' by selling RE to other Canadians who took on large amounts of credit at extremely high valuations.  The foreign money "meme" has been significantly disproven and it is completely implausible that "foreign money" could just appear in a single asset class to the exculsion of nearly all others.  

In reply to by VZ58

johnnycanuck Bondosaurus Rex Sun, 04/22/2018 - 16:22 Permalink

Is it so easy to forget where this got out of control?

See, the storm clouds gathered prior to 08 what with falling interest rates that made little sense, then came the US subprime scam bubble bursting in air.  Unfortunately, their flag was still there..:(

So, enter Canada's Conswervative Party..joined at the hip with the money changers, who had this idea.  They thought the way for them to survive politically was to do things like introduce a 40 year amortization with virtually no money down.

And that was only the beginning of them leading the poor simple minded Canadian sheep through those doors from whence a woolly mark never returns.

Meanwhile, the money changers did what money changers often do, made out like bandits.

In reply to by Bondosaurus Rex

Lore johnnycanuck Sun, 04/22/2018 - 22:22 Permalink

Attributing it to the Cons is an innocent mistake. All politicians do as they're told. It makes no difference who sits in parliament; the sheeple will always clamor for more debt, and the bankers will always give it to them.

The biggest bubble of all is government, because it's all predicated on that continued issuance of debt AND the presumed ability to service it by sucking the bottom a little drier in perpetuity.  It only works while the system is growing. Falling EROEI (energy return on investment) guarantees a systemic shock before the end of the present decade. And unfortunately, governments are getting away with policies that will handicap the ability of productive citizens to respond properly to the crisis.  A permanent underclass of human garbage is being actively injected into all western nations in anticipation of the disruption, because the elites know that the average moron will focus on superficial (but admittedly important) tribal differences, channeling anger over the destabilization and fall in standard of living upon other affected groups and failing to maintain focus on the psychopaths at the Top who made the deliberate decision to create the imbalances in the first place.

Going forward, the only candidates who should receive any votes for local government are those who will address DOWNSIZING OF GOVERNMENT and ELIMINATION OF DEBT.  Any government official who proposes BAILOUTS must be immediately REMOVED.

Longer term, responsible societies need to pursue a WAR ON DEBT. Consider all the misery caused by debt traffickers over the past century. Issuance of unmanageable debt should be legislated as a capital offense, with public execution for those found guilty. The message should be explicit, like how officials treat drug dealers in Singapore.  Enter the country, and you're handed a card: "Death to Drug Dealers."  Well, we also need "Death to Debt Dealers."  Society will only behave responsibly when those who contribute deliberately to its destabilization are eliminated outright. Power must be taken away from psychopaths. One does not 'reason' with them; one does not expect them to adhere to some 'code of conduct.'  Particular focus will need to be given to the debt-based western central bank franchise.

I know, it's a rather big cultural shift from what we see now, with all the sheeple drowning in debt and supporting any and all policies that keep the party going, including passing the debt load to the next generation.  When a few tens of millions get wiped out by scarcity and wars resulting from breakdown of credit, public opinion will change. 

In reply to by johnnycanuck

karenm Sun, 04/22/2018 - 15:02 Permalink

That's what you do when you can't pay your mortgage or car payment. They'll tell their lender they want the money for a vacation or some other cool sounding thing, because it's embarrassing to admit you need it to make the payments you owe them.

 

Not to mention the adverse affect it may have on your mortgage renewal, the same renewal many Canadians are dreading already due to the 30% increase in their monthly payments because of rising rates.

 

Oh, and Canada could not even handle a 10% drop in prices, nevermind 35%. Those govt stats are bull shit as always. Canada has been in a recession for years. A 35% drop would put the country in a depression 5 times worse than the great depression.

pitz karenm Sun, 04/22/2018 - 15:12 Permalink

About 5 or 6 years ago, the major banks in Canada, pretty much in unison, dropped the requirement to make principal repayments on unsecured LOCs.  Now they just require interest only mostly.

Apparently too many people were going to the bank machines, withdrawing a few hundred, and immediately re-depositing the withdrawn cash into the same accounts so as to constitute a 'payment'.

The ABMs record the serial numbers of every bill dispensed, and now, record the serial numbers of every bill taken in.  So they have some pretty good metadata in their system as to who is doing such, merely re-cycling cash through their own accounts, and can hit those people with even higher risk premia for such activity.

In reply to by karenm

pitz bruno_the Sun, 04/22/2018 - 15:41 Permalink

Nope, Chinese-Canadians pay credit, just like everyone else.  Unless they worked in Canada and saved up a lot of money.  Evidence of foreign inflows or foreign participation in Canadian RE is slim to non-existent.  Racist attitudes unfortunately persist towards Canadians of non-European ethnicity, particularly Chinese ethnicity.

In reply to by bruno_the

OverTheHedge pitz Sun, 04/22/2018 - 16:16 Permalink

Earlier today I posted this on another article: https://en.m.wikipedia.org/wiki/List_of_countries_by_current_account_ba…

It shows that the US has the biggest current account deficit by far, then the UK, the Canada in the number 3 spot. The US has the reserve currency, and the uk appears to be living in a Dreamworld, but Canada? Number 3? 55.5 billion dollar (US) deficit, to be covered by 35 million people. And that's just for this year. Does anyone know what they are doing with the money? Or how they are planning to pay it back?

Oh! Canada!

Edit:

And then I found this: https://www.theguardian.com/world/2016/mar/22/canada-liberal-budget-def…

  • Finance minister predicts C$29.4bn deficit this year
  • New government delays plan to buy military hardware indefinitely

Is Wikipedia wrong? How could that be?

In reply to by pitz

pitz OverTheHedge Sun, 04/22/2018 - 16:29 Permalink

A $30B deficit is only $300B if you use the traditional 1:10 ratio between Canada and the USA.  The US in comparison is running a deficit of ~$1.7T.

So the US has a deficit over 5X larger than Canada's on a per capita basis.  

Wikipedia, of course, you have to be really careful there, its chock full of fake news and distortions.  Not exactly a very reliable or trustworthy source, especially since its full of teenaged liberal trolls as moderators.

 

In reply to by OverTheHedge

VZ58 pitz Sun, 04/22/2018 - 17:18 Permalink

You've got to stop this regurgitation ad nauseum of your "its not the Chinese" mantra. Even they don't dispute it anymore, so you can relax and accept reality. No one really cares, because they infused the country with cash - even if it is illegal - and no one cares. The Liberals in power certainly don't and neither do the NDP or the CPC. And the bitching "Canadian locals" who scream keep out the Chinese are thesame utter morons that still vote in the social Marxists, thinking that anyone cares about the plight of the lower class worker, so they will always be lower class economic losers commuting from Surrey and wondering why they never amount to anything.

In reply to by pitz

pitz VZ58 Sun, 04/22/2018 - 17:26 Permalink

If the country was infused with cash, why is credit off the charts, particularly against RE?  As this article notes?  Why are nearly all other asset classes outside of RE and credit (ie: bonds, GICs, MBS, fixed income, etc.) priced at fairly low extremes?

Hint:  its not "Chinese money", its Canadian credit granted to Canadians that has caused the RE bubble.  The data makes this abundantly obvious.

In reply to by VZ58

Déjà view pitz Sun, 04/22/2018 - 21:08 Permalink

Per Capita: Canesestan Worse than U.S.!

COUNTRY COMPARISON :: CURRENT ACCOUNT BALANCE

EUROPEAN UNION $387,100,000,0002017 EST.

GERMANY $296,000,000,0002017 EST.

JAPAN $175,000,000,0002017 EST.

CHINA $162,500,000,0002017 EST.

199 CANADA -$55,570,000,0002017 EST.

200 UNITED KINGDOM -$91,420,000,0002017 EST.

201 UNITED STATES -$462,000,000,0002017 EST.

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2…

In reply to by pitz