Canadian Home Equity Loans Surged After Regulator Warnings

Canadian homeowners have been using their home equity to secure an alarming amount of debt. Filings with OSFI, Canada’s bank regulator, show the value of loans secured by housing continued to advance in October. Over the past year, growth of loans secured by home equity has surged at one of the fastest rates ever. It’s still too early to tell, but there are some signs that higher interest rates have begun to slow the pace of borrowing. 

Canadians Have $309 Billion In Home Equity Debt

Canadian homeowners have borrowed against a significant amount of equity. Loans secured by home equity rocketed to $308.9 billion in October, up 0.1% (+$0.3 billion) from a month before. The balance is a whopping 9.6% (+$27.0 billion) higher compared to the same month last year. For comparison, it’s equivalent in size to Alberta’s gross domestic product (GDP). It’s huge for consumer loans.  

Canadian Debt Secured By Home Equity

Canadian household debt secured by residential real estate equity.

Canadians Using Their Home As An ATM Might Be Slowing

Monthly growth shows some signs of the trend slowing. October’s growth rate was the smallest in nearly two years, last matched in January 2021. It was also the worst October since 2019, when interest rates last hit a cycle peak. The slow month put an end to the highest annual growth reported in decades, possibly ever. 

Canadian Debt Secured By Home Equity Growth

The annual growth of household debt secured by residential real estate equity. 

Annual growth is just off the record rate but still flying very high for such a large debt pile. October’s numbers show the fourth largest annual rate, beat only by the three preceding months. A single month of deceleration doesn’t make a trend, but the sharp rate drop indicates there’s suddenly a lack of interest in this area. 

The surge in growth comes after repeated warnings from the bank regulator. OSFI has found increasing evidence that indicates homeowners have been using their home equity to finance their lifestyle. This both hides their vulnerability, as well as ties economic consumption to home values. It provides a greater risk when the surge is aligned with unsustainable home price growth, like we just saw. Any economic shock or a home price correction can compound fallout to the economy as this problem grows. 

Article By: Daniel Wong