Canadians took a break from borrowing home equity, but are back in full force. Office of the Superintendent of Financial Institutions (OSFI) filings show home equity borrowing reached a new record high in November. The month was also the fifth consecutive we’ve seen acceleration of growth in this segment.
Loans Secured By Residential Real Estate
Regular readers can skip this, but for new readers – here’s a quick explanation. Loans secured by residential real estate are when borrowers use their home equity to secure a loan. The most common form of these loans are home equity lines of credit (HELOCs), but there are a few other similar loans. By pledging home equity, they can borrow at a lower rate than an unsecured borrower. They can also often skip those pesky income checks that make sure you can pay the loan back. These loans fall under two categories – personal or business.
Both loans are done in similar fashions, but they mean different things. Personal loans are generally for consumption, and are used for non-productive reasons. Canadian banks advertise these as a “convenient” way to buy a second property, or finance a vacation. Not the worst way to spend it, but it’s a non-productive pillaging of home equity. That can become a problem when you’re borrowing at peak prices.
A business loan secured by residential real estate is typically for productive reasons. A borrower is pledging their home equity for access to business capital. Since people borrow to expand their business, this is considered a positive sign. These borrowers are not just borrowing to make a productive investment. They’re also demonstrating that they’re confident enough in the economy to expand at this time. We want to see growth here.
Canadians Borrowed Over $296 Billion of Home Equity
Canadian households set a new record for borrowing home equity. Bank filings show households owe over $296.2 billion in November, up 0.7% from the month before. This represents a 4.72% increase compared to the same month last year. It’s also the fifth consecutive month we’ve seen this number grow. Let’s break it down to see where this growth is coming from.
Total Loans Secured With Residential Real Estate
The total of personal and business loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Canadians Secured $266 Billion of Personal Loans With Home Equity
Personal loans represented the vast majority of debt secured by home equity. Banks held $266.4 billion in November, up 0.63% from the month before. This represents a 6.42% increase compared to the same month last year. In addition, this is also the fifth consecutive month the annual pace of growth has accelerated. Households are increasingly turning to home equity to fuel personal loans once again.
Personal Loans Secured With Residential Real Estate
The total of personal loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Canadians Secured $29 Billion of Business Loans With Home Equity
The balance of business loans secured with home equity is falling. Banks held $29.8 billion in November, up 1.37% from the month before. This represents an 8.34% decline compared to the same month last year. It’s also the 8th month in a row that we’ve seen this number showing negative annual growth. Why wouldn’t the credit segment we want to see expand, shrink right here?
Business Loans Secured With Residential Real Estate
The total of business loans, secured with residential real estate.
Source: Regulatory Filings, Better Dwelling.
Canadians printed a new record for debt secured by residential real estate. Many lenders and regulators likely didn’t think much of the issue as prices made record gains. However, we’ve officially entered an era where home prices are growing at a slower pace than the equity being extracted. That means without a price drop, home equity is disappearing faster than it’s being built.
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Extend and pretend…
How are people supposed to just live in a million dollar bungalow without $100k Tesla in the driveway?
I needed that laugh. And I agree.
Prepare for this to rise as people settle into their lifestyles. Hit peak growth in the US a couple of years after prices peaked, so you’re looking at another year or so probably.
A study recently conducted showed the US home price gain during the bubble was almost entirely wiped out by HELOC use. What I’m noticing is a lot of Canadians are still unaware that there’s a national market on the way down.
There should be a big spike as condos in Toronto and Vancouver get delivered this year. Record amount of building, fueled by negative yield investors that were told by their mortgage broker and banks that using a HELOC to buy another property is a good idea.
A lesson for the Boomers and GenXers: “Leverage works both ways.”
True.
If you need a visual google ‘Coyote & Road Runner, seesaw and anvil’
Add ‘overhead cliff ledge’ for extra fun.
I think we can understand the macro pressures that are beginning to mount but I’d just like to point out something that wasn’t extrapolated above…a business loan is assessed differently (or everyone would just take out a personal loan and ‘figure it out’) and the underlying business health is determined because while the collateral is personal the viability of repayment is assumed to be against the business since the business, even as a sole proprietorship, is by definition a separate entity. I see a drop in business loans against personal real estate to be quite telling and suggesting small business owners have been cut off. Are they just using their personal loans? Maybe but a bank would be pretty stupid to deny a business loan but turn around and let Uncle Tony take out a half-millie 10 minutes later. These are the sort of cracks that we should try to pay attention to. More research is required, one comment/data-point means diddily but when everything is up on a wall and dots are connected something like the continued decline of business loans against personal real estate, generally for small business, should be evaluated independent of the noise surrounding personal real estate. Tock. BD4L.
Since you’ve mentioned business…
“About 80 percent of Canadian non-financial stocks have been cash-flow negative in the past 12 months.”
https://www.bloomberg.com/news/articles/2019-01-18/a-top-performing-hedge-fund-is-shorting-canada-banks-on-housing
Easy money always end this way.
Good post. Look into BBB and BBB- companies. After you throw up and/or drink yourself into a stupor, let me know what you think about the outlook for mid-caps and what could happen with even a single downgrade to junk. Tock. BD4L.
As bad as the swelling corporate BBB pile is (160B in downgrades to BBB last quarter alone), it pales in comparison with CLO crap-show (think CDO before 2008).
It is not unreasonable to expect that in a not so distant future all debt may be re-priced almost instantaneously and that is in my view the key reason behind the recent announcement of the BOC MBS buying program. They will try to soften the blow because no one will come close to Canadian banking debt even at remotely current yields. Feel free to extrapolate the impact to mortgage/HELOC rates.
The mind-numbing part is that Canada not only has a much bigger housing bubble than US before 2008 but it also currently has a higher corporate debt too.
This will eventually show up in the 6 big banks balance sheet and start alarming international mutual fund and investors. You might right about the BOC MBS program. It might be a way to hide from international investors the bad balances sheet of the 6 big Canadians banks and the affect of the housing crash on Canadian economy.
Canadian dollars is thinly trade and a housing market crash followed by Canadians banks crash could collapse the Canadian dollars value and create hyperinflation and therefore forcing the bank of Canada to raise rate to protect the dollars.
Some other smaller lender like Equitable Trust, People Trust will eventually be affected by the housing crash. For someone with good knowledge of the financial market, shorting these stock could be very lucrative.
I’m not sure I agree “small business owners have been cut off.” Many folks borrow to grow their business or take advantage of business opportunities that arise. The few small business owners I know in Toronto and Montreal have switched from a growth mindset to a defensive posture, some time in 2018. They aren’t borrowing to take on new work they are not yet equipped to manage.
True. I didn’t consider the demand side of the equation; this could be a result of re-forecasting but I believe that either way, this is an indicator of weakness. We’ll have to see what bubbles to the top over the 3-6 months before everyone starts using the big R. I suspect reality is somewhere in the middle. Tock. BD4L.
It appears that the sales numbers so far for this month will create new historical records for the City of Toronto and Markham.
Thanks for the data, you are right — the rise of Real Estate Loans (HELOCs) balances has Dramatically lagged the % increase in homes prices since 2012
From Jan. 20212 $230B to $296B up 26%
So implies LTV ratios should be down vs 2012… which is a good thing
Last week’s news was that millennials will make up the largest voting block…
This week’s news: Fincance minister wants to help millennials buy houses…