Canadians are going all-in on housing, as it’s increasingly seen as a low-risk asset. As debt grows faster than the economy, the ratio of mortgage debt to gross domestic product (GDP) has been soaring. Canada has created so much moral hazard, home prices no longer fall during a recession. Instead, households are leveraging up and devoting even more capital to housing debt. This trend is accelerating as Canadians see little use for money other than housing.
Canadian Mortgage Debt Has Grown Almost Twice As Fast As GDP
Canadian mortgage debt barely misses a beat, even when the economy slows. Over the past 10 years, outstanding residential mortgage credit has increased by 71.5%. In contrast, nominal GDP increased a modest 39.3% — strong growth but dwarfed by mortgage debt growth. Mortgage debt has grown at nearly twice the rate of economic output. This puts households at a much greater risk of correction — or at least paying for a bailout.
Canadian Mortgage Debt To GDP Is Now 71%
Mortgage debt has grown faster than GDP consistently, reaching nearly three-quarters of GDP. Outstanding residential debt reached 71.0% of GDP in Q2 2021, down from the peak of 79.5% a year before. That minor skew was due to lockdowns suppressing trade temporarily. Now that things have returned to normal(ish), we have a better idea of GDP. Even with the pullback, though, it’s still 5 points higher than it was in Q4 2019, before the recession.
Canadian Mortgage Debt To GDP
The ratio of seasonally adjusted mortgage debt to gross domestic product (GDP) in Canada.
Source: Statistics Canada; Bank of Canada; Better Dwelling.
Mortgage Debt Is Growing Much Faster Than Canada’s Economy
Zooming out, we can see this trend is a long-term one. In 1990, the ratio of mortgage debt to GDP was just 34.0% in Canada. It took 13 years for the ratio of mortgage credit to GDP to rise 6 points, breaking above the 40% ratio. In contrast, the past 13 years have seen the ratio increase a whopping 22.7 points. Mortgage debt isn’t just growing faster — growth has been accelerating.
Canada’s economy is more dependent on residential real estate and turning into a housing Ponzi. Housing investment has outgrown business investment for the first time since 1961. Households are also dropping entrepreneurship, while more people become “housing investors.” Canada is now at the point where the banks that profit from mortgage debt are warning this is a reckless scenario.
Can someone explain why this is a problem? I don’t get it. So what if housing investment is large. Doesn’t that make it safer and protect Canadians because the government will be careful not to allow house prices to fall?
No, it’s the opposite actually. Every point household debt increases, reduces long-term GDP growth by 0.3 points. As this rises, households have less to spend in the economy. Once the economy is stripped of growth, it creates structural issues that make recessions deeper and longer lasting.
It’s all fun and games to expensive real estate until you don’t have any jobs or tax revenue to support your economy.
Nobody cares about long-term growth anymore. Household debt is what is driving the economy. Your HELOC is basically an unlimited checking account. Need a new 100K Benz – HELOC. New kitchen and swimming pool – HELOC. Downpayment for your 3rd investment property – yup, HELOC.
As long as the government money printer stays on, there is no end to this cycle. Next stop, UBI for everyone!
agreed!
It really is a marvel to watch all of these experts watch this and then say with a straight face, this is completely normal.
By no measure is this a normal situation.
And the idea that housing, like the banking industry, is too important to fail … that’s like saying the Titanic is too important to sink.
My parents bought me a house so I have no debt but most people I know are drowning in debt.
No wonder it is so large compared to GDP.
good for you!