The pandemic didn’t slow Canadians from borrowing more to buy real estate. In fact, mortgage data may be showing the exact opposite. Statistics Canada (StatCan) data shows residential mortgage credit hit a record in 2020. Typically during a recession credit growth is expected to slow down. Last year saw the opposite, with declining rates pushing growth to a multi-year high.
Canadian Households Owe $1.65 Trillion In Mortgage Debt
Canadian mortgage debt hit a new record high, at breakneck speed. Households had an outstanding balance of $1.65 trillion in Q4 2020, up 2.1% ($34.4 billion) from the previous quarter. Compared to a year before, this number is 7.1% ($110.0 billion) higher. These numbers only include the total of residential mortgage credit held by households. Business owned residential real estate is excluded.
Canadian Residential Mortgage Debt
The outstanding dollar amount of residential mortgage credit households owe. Source: Stat Can, Better Dwelling.The rapid rate of mortgage credit growth isn’t just fast for this period, but it’s monumental for any. The quarterly increase of 2.1% is the biggest since Q3 2015. The dollar increase of $34.4 billion is unprecedented for a single quarter. To say households are comfortable borrowing during the recession is an understatement.
Canadian Residential Mortgage Debt Change
The 12-month percent change in the outstanding dollar amount of residential mortgage credit owed by Canadian households. Source: Stat Can, Better Dwelling.Even factoring in the pandemic’s worst quarter, the annual rate of growth is a multi-year high. Mortgage credit’s 7.1% growth is the highest rate since 2011. Worth a mention is mortgages were growing at a multi-decade low before the pandemic. The recession’s low rate environment provided stimulus, which may seem unexpected. It’s likely a welcome and desired effect for policy makers.
The record mortgage growth is very large, but there is a base effect occurring. Mortgage credit had unusually low growth in 2019, so it was likely to accelerate in 2020 anyway. The boost from lowered interest rates helped give it a big boost though – like pouring gas on a fire breaking out.
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Let me tell you why the real estate markets are all surging.
Think about it this way, rational Canadians were on the side lines before the pandemic. But imagine that the biggest economic shock and lockdown didn’t sell real estate prices correct. If the pandemic cant make prices drop, nothing will. Thats when even rational people decided to jump in the market.
The biggest mistake the government made was to give blind mortgage deferrals to everyone to save house prices. This signals to the rest of the country that the prices will never drop. That is why you see people offering over asking to get in. If the pandemic didn’t drop prices will the subsequent printing of magical money drop prices??
The government should have let prices drop during the pandemic, now its too late. The only way out is to keep house price increase lower than the inflation rate. Or in other words let inflation rise.
that’s exactly what happened to one of my friends. For years he stayed on the sideline expecting a correction (like i did). When Covid happened, we were sure the market would crash. He got shocked of its resilience and decided to get in before it was “too late”. What the government and the BOC are doing bring a huge stress to the middle class
That is because these buyers think there will be oversea buyers buying from them no matter what and how ridiculous the price becomes. They may not know now the Chinese government is working very hard not letting the money to exit the country. The ultra-rich Chinese will always find their way to invest, but they are smart enough to realize that the Canadian ones are not good value for money. They are investing elsewhere now.
Most people let fear, greed and impatience take control of their lives. In many areas in life you can find examples of this. Very few people follow the rules of the road. Very few people are loyal to their partner and do things behind their back. People are jealous and conspire to make other people look bad. People will simply be friends with someone solely for their own benefit. People are very flawed beings but we have it so good in life today that we forget we are human. The coming crash will remind people how human they really are.
Look, if you study housing prices in all countries other than U.S. No government will pop this housing bubble. It already too bug to fail, they had a chance to lower housing prices during the pandemic, instead to choose to prop it up.
They will simply do what other countries have done. Marginally slow increase of housing price and let inflation go higher for maybe 10 years. In which point, house prices relative to all other prices would be lower. Because, again housing is too big to fail at this point.
They had the chance to let housing go lower during the pandemic, now that chance have passed. They are not going to sink the economy just to correct housing now.
The government is running our of ammunition to keep housing going. It can’t keep at this trajectory forever be it locally, nationally or globally. A correction will eventually happen and when it does a lot of people will find themselves deep underwater. Where I think it will eventually burst, at least in Canada, is from the bottom, with the loss of first time home buyers. At this point pretty much only first time home buyers who can access the Bank of Mom and Dad can afford a downpayment for their first house. Immigration, another source of first time home buyers is at record lows and will likely remain so for sometime. We’re creating 2 homes for every 1 new household formed. That’s where the bubble will pop. With no first time home buyers no one is moving up and that’s where prices begin to first stop growing, then deflating and eventually crashing.
That is not how it works.
How does it work then?
I was replying to Holton. I sorta agree with what you said.
You need rapid WAGE inflation not just commodity and asset price inflation for your theory to work. All we are going to get is the latter. With A.I. and robotic automation and the fallouts from this pandemic in the next 10 years the middle class will be wiped out. The middle class is what defines a 1st world country. Without it you are left with working poor and elites which is what you have in third world and emerging markets. That’s not good.
When real estate all across Canada is overpriced, what exactly is the exit strategy of Canadians who have sunk nearly all of their net worth into their house? In retirement you sell your house to net a cool million or three – and then what? Where do you live? House prices are inflated from Kelowna to St John’s. Stay in your city and retire to a leaky condo with paper-thin walls? Or leave all your friends behind and move to Nevada?
Yeah, I don’t think that people have really thought this through.
They can sell their overpriced detached and buy an overpriced townhome in the same city, and put the remainder into a dividend-yielding diversified fund.
Or they could sell the house and – gasp – rent in their golden years.
Ah the “problems” of the Boomers. Millennials would love to have these sorts of “problems” of how to spend their millions gifted to them from the Bank of Canada and government.
Renting is logical but I think that generation, after decades of watching HGTV, is constitutionally incapable of it. They can’t rent. To live is own property and, ideally, remodel it every 5 years.
The only difference being I think from what I understand is that this will keep going until the debt burden gets to a point where people don’t have much money to spend on goods and services then the economy will start to suffer.
Oops that reply was for Holden
I agree 100% with you Jason, people can only take up so much of the debt and Canada has been growing just due to debt which has gone into housing rather than building other job creating industries, housing alone can create only so much. Tiff Macklem also said the same thing, economy cannot grow by just firing on one cylinder.
In last ~25 yrs favorable factors i.e. decreasing interest rates allowed people to take on more debt while paying out same amount to service that debt. Now with not much room to fall for interest rates, people will not have the same option to take on more debt and still not have impact on the share of wallet going to service the debt. I believe this debt circus would slow down at some point, but when has been everyone’s guess for quite some time now.