Canadian Home Renovation Loans Make A Sharp Drop, Falling To 2013 Levels

The Canadian renovation boom is slowing, or at least the debt to finance it has. Bank of Canada (BoC) data shows loans for home renovations made a sharp drop in the first quarter of 2021. The balance of these loans had seen a surge during the pandemic, but rolled back in the last quarter. It didn’t just roll back pandemic gains either. The balance fell to the lowest level since 2013.

Canadians Owe $2.87 Billion On Renovation Loans

Canadian debt for home renovations slid lower, continuing its long-term trend. The balance reached $2.87 billion in the first quarter of 2021, down 4.26% from the previous one. This brought annual growth 2.74% lower. The sharp quarterly drop puts the balance at the lowest level since 2013.

Canadian Home Renovation Loans

The outstanding balance of bank loans for home renovations, in billions of Canadian dollars.

Source: Bank of Canada; Better Dwelling.

Home renovation loans were climbing pre-pandemic, and took off last year. Annual growth turned positive in the fourth quarter of 2019. This was the first time since the beginning of 2017 the segment of debt had accumulated. The third quarter of 2020 also printed the largest annual growth since 2016. Now things are reversing, with the sharp decline in the first quarter of 2021.

Growth In These Loans Often Precedes A Boom, Falling Levels Precede A Top

These types of renovation loans have often preceded a real estate sales boom. In the late 1980s, before the “bubble” there had been a surge of activity. Prior to home sales peaking before the Great Recession, there was a surge of activity as well. From 2015 to 2016, growth in renovation loans preceded the Toronto and Vancouver mini-bubble.

In 2019, Canada had begun to see growth finally return. The second quarter of 2020 is an exception, being the first full pandemic quarter. This may reinforce the industry narrative of slowing sales and home price growth.

Long-Term Trend Towards Fewer Renovation Loans

These types of loans are typically used for large renovations, and often by flippers. The growth trend in this segment has been on the long-term decline. The balance peaked in the third quarter of 2009 at $5.14 billion. By the first quarter of 2021, the balance dropped 44.16% from the peak. Last year’s spike was interesting to see, but quickly disappeared.

Home renovation-specific loans aren’t the only way renovations are funded. Savings are the most obvious way people pay for small and mid-sized renovations. HELOCs and private loans are also popular, and don’t specify renovations. Some even use their credit cards, combining their passion for paying high interest.

The decline in bank loans for renovation doesn’t mean fewer people are renovating per se. Just that fewer people are taking out renovation-specific loans. It’s more of a sentiment indicator for the perceived incentive to renovate.

While not a comprehensive look at renovation spending, it’s often a sign of the top. If a seller or flipper could add value to a home by renovation before selling, they would. They borrow money, and it’s often seen as a small investment. If renovations add little value, or homes trade at a premium, there’s little incentive.

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