Canadians borrowed $22 billion more against their home equity, a new growth record
Canadian real estate values are skyrocketing, but homeowners don’t want to sell to exploit this bargain. Instead, they take out equity loans — big loans. Regulatory filings reveal an increase in debt on the home equity line of credit (HELOC) in April 2022. However, HELOC debt represents only a portion of total home equity loans. Including similar loan products, the size of the debt almost doubles. They are also growing at one of the fastest rates in history, despite higher interest rates.
Canadian HELOC debt grows at fastest pace since 2013
Canadian HELOC debt is climbing after losing popularity for a few months. The outstanding balance reached $168.8 billion in April. This is an increase of 0.9% ($1.6 billion) over the previous month and 1.8% ($3.1 billion) more than last year. HELOC debt has generally been declining since 2010, but the trend is now reversing.
Canadian debt HELOC
The outstanding balance of the Canadian mortgage line of credit held by the institutions.
Source: OSFI; Live better.
The growth may seem small, but there has been a change in trend that is worth noting. With annual growth of just 1.8% in April, the rate is the highest since April 2013. Outstanding HELOC debt only recently returned to positive growth in February. Before that, only about 1 year in the past 9 years showed positive momentum.
Growth of Canadian HELOCs
The annual growth rate of Canadian HELOC debt.
Source: OSFI; Live better.
No, that does not mean that Canadians do not use their homes as an ATM. Rather the opposite. The difference is that the regulator has decided to place a strict definition on HELOC products. Similar product types are no longer included in the outstanding balance. For example, if you have a fixed term home loan, it is not a HELOC. This requires variable rates.
This last point might give a little insight into why HELOC loans are suddenly on the rise. Variable rates were not popular during the low rate era of the last decade. Why not block your cheap debt just in case something happens? Now that fixed rates are rising, borrowers are often turning to variable rate loans. They save a little money, probably doubting that variable rates will soon switch to fixed.
Now, if we include the other types of home equity loans, we see a big increase in debt. Not only the balance of loans secured by housing, but also the growth rate.
Canadians owe $295 billion in debt secured by their home equity
The combined balance of all secured home equity loans is much higher. The outstanding balance reached $294.9 billion in April, a new record. It was up 1.3% ($3.8 billion) from the previous month and up 8.0% ($21.9 billion) from a year ago. Annual growth was also a new record.
Home equity debt is growing at breakneck speed as homeowners tap into their windfall to spend. This most likely gave a strong boost to consumer consumption. In other words, a lot of the spending or investing we’ve seen is based on borrowing from recent earnings.
That’s part of the problem of letting home price growth run wild for years. Economic growth is slowly becoming more dependent on the borrowing of non-performing asset gains. The longer this lasts, the greater the impact when the economy has to return to real gains driven by productivity rather than growth in the prices of non-productive assets.