Canadian homeowners are tapping their real estate windfall to fund a spending binge. Bank of Canada (BoC) data shows home equity lines of credit (HELOC) debt surged in September. HELOC debt slowed last year but now it’s back with a vengeance, growing faster than the economy. Experts say it provides a boost to the economy but it also makes it more vulnerable to shock.
Canadians Have Borrowed Over $270 In Home Equity
Canadian HELOC debt is rising at a brisk pace adding billions over the past year. The balance of outstanding HELOC debt hit $270.2 billion in September, up 0.65% ($1.7 billion) in one month. Compared to the same month last year, the balance is 4.40% ($11.4 billion) larger. The size of home equity borrowed in the past year was as big as some whole economies.
Canadian HELOC Debt
The total outstanding of home equity line of credit (HELOC) debt held by institutional lenders.
Source: Regulatory Filings; Better Dwelling.
Canadians Are Getting Comfortable Using Their Home As An ATM
HELOC debt has been growing at a brisk rate despite the massive size of the debt pile. The annual rate of growth is a downtick from a month before, but still the second highest number since May 2019. As the debt pile grows the rate of growth is naturally expected to slow, but it’s still very large. Over the past year households borrowed $11.4 billion — more than the annual GDP of PEI. These are huge numbers, even though the rate might seem deceptively small.
Canadian HELOC Debt Growth
The annual percent change in the balance of home equity line of credit (HELOC) held by institutional lenders.
Source: Regulatory Filings; Better Dwelling.
Canadian HELOC Debt Is Growing Much Faster Than GDP
Speaking of economic growth, HELOC debt is growing much faster than GDP. The monthly growth for September dwarfs the 0% growth in the country’s flash estimates. HELOC debt is now the equivalent of 14% of GDP, which was just 11.9% five years ago. It was still a high ratio but gaining two points on the economy is huge.
Canada’s increasing HELOC problem is a little more complicated than just a “debt is bad” argument. Homeowners are tapping equity at a rate where it’s now a significant economic driver. Fast rising home prices tend to produce a wealth effect (i.e. owners spend because they feel rich). The borrowing has been supplementing tepid wage growth. In short, this is another indicator showing Canada has gone all-in on housing.
Interesting! I think I’m in the minority that house prices will not be coming down any time soon. The gov can’t let that happen, so they’ll do whatever it takes to keep it that way.
However, if house prices were to drop, people would have less reason to sell, especially if it put them in a loss at the time they were looking to sell. Therefore, less homes on the market in the future as there’s no need to sell/be nuts to sell.
Of course, there are bankruptcy situations…
Jimmy
It’s a very shakey premise to say that the government cannot let home prices fall. If inflation persists a government may not have a choice to raise rates. Sometimes it isn’t within their control.
Yeah, that’s not exactly how this works. Obviously no one knows whether the market will go up or down but you’re highly underestimating speculator fear. So many places are cash flow negative, so there’s no incentive to hold onto an asset that isn’t making money from appreciation. These people, plus the people who have to sell, will make the market price.
That said, most people I know who have a house aren’t thrilled about prices either because they recognize that it’s going to lead to higher taxes and that they’re stuck on their rung of the property ladder. Most people’s equity is stuck unless they’re taking out a HELOC. I think if prices fell we’d see more liquidity because homeowners who actually live in the place they own (remember those?), will have more incentive to move. Who cares if your property dropped in value if the place you’re buying also dropped in value… less real estate fees, less land transfer.
“The gov can’t let that happen, so they’ll do whatever it takes to keep it that way”
This thinking is precisely one of the reasons we’re in a bubble of magnificent proportions. The government pulled out all of the stops during the pandemic of ’20 to such an extent that worsened the housing crisis to the point it is now obvious to anyone paying attention. A country that can’t provide affordable homes to its people is not a great place to live and will become less attractive to would-be immigrants. A country that locks a third of its people out of being able to buy a home and forces them into paying off investments of the richest few is a terrible place to live.
20% of Canadians are now experiencing housing poverty, worse among immigrants. Think about this for a moment — rents are still catching up to price gains from the last two years, and the inflation of housing costs are still not fully apparent. What happens if prices keep going up? I’m a young highly educated Canadian and I already left Canada for a better quality of life because of insane home prices. I’m not taking a mortgage 5x household income of someone in the top 5% of income to buy a condo 2 hours from Toronto, no thanks. That’s poor value for my money on a global scale.
There are only a few ways out of this crisis: 1) rapidly scale production of homes (supply) and limit investor activity in all new builds, but Canadian government is unable to act fast enough, we’re not China who can build entire cities in a year; 2) absorb more risk and print more money, but this will only worsen the affordability crisis and increase inflation, creating a different national crisis; 3) strictly regulate RE investing, increase taxes on RE investing, dramatically increase transparency, and clamp down on foreign money laundering, which could in itself cause a correction; or 4) let the market do its thing.
The government could delay the crisis from coming to a head so long as the global economy was stable, but that period of history is over now.
It’s also a misunderstanding to assume that the only reasons people sell homes are to realize return on investment or due to bankruptcy.
Multiple property investors will sell if they see negative future gains due to housing prices decreases cutting into capital gains OR decreases in rental prices (which follow housing prices). Keep in mind that high rental prices are being used to offset mortgage payments made by investors to ensure they earn an adequate return.
Foreign investors are likely to sell not necessarily if housing prices drop, but might do so if their capital access is squeezed (I.e. Chinese buyers trying to pull capital out of mainland China, or a downturn in the equity market that might make P/E ratios more attractive in equity and thus driving down the apparent advantage of housing investment).
Finally, home owners who locked in variable rate mortgages at low rates that already stress their finances are likely to see net negative cash flows if mortgage rates rise. One would imagine this only causes bankruptcy, correct?
No, that’s wrong. Bankruptcy is an extreme end of a spectrum of behaviour when housing returns run negative. Another obvious option, in the case of a small downturn in housing prices driven by an increase in variable mortgage rates is homeowners might sell at a capital small loss in order to rental at much lower rates. Keep in mind that at current prices, a person who buys to rent out a home is effectively paying their renter a subsidy. When rental rates are favourable, it will be rational for many people to cash in their homes and pay less for a rental thereby freeing up cash flow for lifestyle or other investments.
The important thing here is not to assume that any of these specific things will happen. Rather you have to recognize that when housing comes to be treated primarily an asset, there are all sorts of individuals who invest in the asset class and they have a wide variety of reasons to sell in order to realize equity for other purposes.
There’s really only one underlying transition that needs to take place for this to occur: future shocks to real estate outlooks must lead investors and home owners to imagine a net negative future outlook in real estate investment. If that happens-and a wide variety of shocks could trigger this-then housing prices and rents can go down for a wide variety of reasons.
It’s also a big mistake to think that the government controls this. For that they would need to have a level of economic prescience that has never before been seen from economists.
It’s anyones guess what will happen in the future. So hedge your bets and don’t over leverage yourself.
It’s actually quite funny since the BOC warned about the surge in combined products which aren’t reflected in this number. Make a payment, immediately withdraw whatever principal you just inserted.
For the BOC to warn about this means it’s a much bigger problem than the general public will ever know.
Wealth effect is the issue they don’t talk about. You feel rich, you borrow your home equity, and then hope the next round of young people will pay your bills when they buy your house.
Home prices fall, you get no growth.
I take it most people here don’t know what the Smith Manoeuvre is?
Nah. Most people here know the Smith Maneuver is an increased leverage risk compared to it just being regular HELOC debt.
It also makes a lot less sense to do when your mortgage rate is 1% like some variable products.
HELOC is actually a good product allowing home owners to avoid “housing poor”. House owners are facing higher costs on insurance, repairs, utilities, property taxes etc. Giving extra liquidity is helping them to not forced to sell by the inflations. They need to survive first before thinking about buying the second house. I don’t understand why BOC keeps posting some figure trying to scare and warn people. BOC’s job is to maintain inflation, not pointing fingers on financial products.
Its a ponzi scheme….if you got in early your laughin….a lot lol
Mortgage holders are bag holders for government bonds….
There is no way out….just keep inflating the bubble to infinity…and beyond