Canadians Are Pumping The Brakes On Mortgage Credit After Hitting 103% of GDP

Canadian real estate prices might be soaring, but mortgage growth is hitting a wall. Bank of Canada (BoC) data shows mortgage credit hit a new record in January 2022. Annual growth is still close to the highest level since 2008, but several signs show we’re past the peak. With rising interest rates shrinking mortgage budgets, further acceleration is an uphill battle.

Canadians Owe $1.96 Trillion In Mortgage Debt

Canadian mortgage credit hit a new record with a double-digit growth rate. Households now owe $1.96 trillion in January, up 0.53% ($10.23 billion) from a month before. The balance has climbed 10.6% ($187.82 billion) from last year, one of the fastest rates ever. For context, mortgage debt as a share of unadjusted GDP would be 103%, dwarfing output.

Experts believe high debt loads result in slower economic growth. They also create more vulnerable households, prone to economic shock. There are broad economic risks, outside of homeownership forming.

Canadian Residential Mortgage Debt

The outstanding balance of Canadian residential mortgage debt held by institutions.

Source: Bank of Canada; Statistics Canada; Better Dwelling.

Annual Growth For Mortgage Credit May Have Found The Top

Mortgage markets show a few signs of growth being close to peak if it hasn’t already passed. Despite surging prices, January’s monthly growth was 10 basis points (bps) below December. As for annual growth, it was just a hair under the month before. Not a huge drop, but demonstrating there’s resistance at this level. In December, Canadians were borrowing at the fastest annual rate since 2008.

Short-Term Growth Implies A Very Sharp Slowdown, Despite Soaring Home Prices

Short-term growth shows activity is slowing as well. The 3-month (annualized) rate fell to 8.61% in January, shaving off nearly a whole point from the previous month. It peaked in June and has been slowing despite home prices climbing. Analysts generally believe the 3-month trend leads the 12-month trend higher or lower. More recent growth is, after all, a closer read to where things are heading.

Canadian Residential Mortgage Credit Growth

The 3-month (annualized) and 12-month rate of growth for Canadian residential mortgage credit.

Source: Bank of Canada; Statistics Canada; Better Dwelling.

Reading the 3-month trend might be a bit clumsy if you’re  not sure what to look for. February/March traditionally mark the bottom of the 3-month trend. Summer months mark the top of activity, since that’s when the most volume is sold. Early signs confirming a slowdown would show peaks and troughs trending lower. To beat the 2021 peak, this year would need an ungodly surge out of nowhere for activity and price. Not impossible, but it is very difficult to see.

Interest rates are taking the long way up in Canada, so a direct material impact is unlikely in the near term. However, the end of low rates accelerated activity over the past few months. People are trying to secure the cheapest debt possible, including homeowners refinancing. Slowing credit growth seen after a mild rate hike is likely due to normalization.