Canadian real estate related debt tapering? That would be ridiculous!
Filings obtained from the Office of the Superintendent of Financial Institutions (OSFI) show, after a brief decline in January, the balance of loans secured by residential real estate hit a new high in February. More interesting is the segment of loans being used for personal consumption, is growing at the fastest pace in years.
Securing A Loan With Home Equity
Loans secured by residential real estate are exactly what they sound like. They’re loans that you pledge your home equity in order to secure. The most common example would be a Home Equity Line of Credit (HELOC). You know, the same type of loan the Canadian government is discretely paying to teach you how to borrow. There’s also more productive uses, like when you start a new business and need to use your home as security – just in case you aren’t able to pay your loan shark bank back.
Either way, debt is debt. The big difference to note is a loan secured for personal reasons, is considered non-productive. The borrower isn’t expected to take a calculated risk, in order to earn more money. A business loan is considered productive, since it might generate more money. This isn’t just our opinion, banks actually classify these loans separately in their filings. Today we’ll go through the aggregate of these numbers, then break them down segment by segment.
People Used Over $283 Billion In Home Equity To Secure Loans
Loans secured by real estate hit a new all-time high in February. The total balance of loans secured with real estate racked up to $283.65 billion, up 0.77% from the month before. This represents a 7.79% increase compared to the same month last year. It almost looked like Canadians were reeling that debt in January, with a tiny decline. Instead it made a monster move, more than making up the ground lost the month before. Now, let’s break this down.
Source: Bank Regulatory Filings, OSFI, Better Dwelling.
Over $251 Billion In Homes Are Being Used To Secure Personal Debt
The total of loans secured with residential real estate for non-business purposes spiked in February. The outstanding balance reached $251.64 billion, a 0.77% increase from the month before. This represented a 6.83% climb compared to the same month last year. This brings the total to an all-time high.
Source: Bank Regulatory Filings, OSFI, Better Dwelling.
The rate of growth is definitely something people should be taking note of. The monthly rate of 0.77% is the fastest rate pace since June 2017. The annual rate of 6.83% is the fastest rate of growth since… well, since banks started reporting these numbers on their balance sheets. Apparently higher rates aren’t slowing borrowers down.
Source: Bank Regulatory Filings, OSFI, Better Dwelling.
Over $32 Billion In Homes Are Being Used To Secure Business Debt
Business loans secured with residential real estate also saw a rise in February. Just over $32 billion in business loans were secured with homes, up 0.86% from the month before. This represents a 15.96% increase from last year. These more “productive” loans, are not at an all-time high. Totes disappointing, we know.
Source: Bank Regulatory Filings, OSFI, Better Dwelling.
The takeaway here is the decline in growth. This is the fourth month we’ve seen the annual trend taper, bringing it to the lowest levels since December 2016. A decline in debt growth is typically seen as good, but we get mixed feelings when business borrowing slows.
Source: Bank Regulatory Filings, OSFI, Better Dwelling.
If you’re going to have debt, it might as well be for productive reasons. Unfortunately, residential real estate being used for personal consumption is reaching the fastest pace of growth in years. Meanwhile the segment being used for business purposes, is seeing growth decline rapidly. That next rate hike is going to be rough.
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And while the desire of some well-meaning members in government to drive down the price of homes through demand-side policy may sound practical at first blush, The British Columbia Real Estate Association warns the government, be careful what you wish for…
The Economic Fallout of Housing Price Shocks
When you consider the broad and deep economic toll that a negative shock to home prices would exact on both homeowners and renters, it quickly becomes apparent that such an approach is at best, a mug’s game. BCREA Economics analysis shows that even a relatively modest negative price shock will produce significant consequences to the BC economy.
Nearly 70 per cent of British Columbian households own their home. A relatively minor 10 per cent negative shock to home prices would extinguish $90 billion of their wealth, or $70,000 of the average home owner’s equity. While some may see this as a paper loss, it will have a significant impact on the economy, as declining household wealth reins in consumer spending. Retail sales would suffer, with an estimated $1.8 billion in forgone revenue in the first year after the shock.
Home construction activity would fall dramatically. Home builders would cut back production 25 per cent; that’s 10,000 fewer housing starts in the first year alone. A negative price shock would markedly slow the expansion of the housing stock, creating even more critical housing supply problems down the road.
Across the economy, a negative home price shock will slow growth. Tens of thousands of jobs will be forfeited. The unemployment rate will shoot up. A 10 per cent negative price shock will slow real GDP growth to 1.5 per cent from a baseline of 2.7 per cent. That’s $3 billion in lost activity. If home prices fell 35 per cent, a level some activists are championing, the BC economy would collapse into recession. The average home owner would have lost $245,000 in equity, housing starts would fall by half, 64,000 jobs would be forfeited – sending the unemployment rate to 7.5 per cent with $4.4 billion in forgone retail sales and a colossal $8 billion loss to GDP in the first year.
This analysis does not account for the negative impact on provincial tax revenues, expanding deficits, ballooning debt and credit downgrade risks.
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