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Canada’s Mortgage Lenders Have Set Aside a Record Amount for Bad Loans

January 16, 2021

Canada’s Mortgage Lenders Have Set Aside a Record Amount for Bad Loans

It’s odd to see it occur while almost every market reports record home sales. 

Canada’s real estate markets are booming, but lenders are preparing for mortgage losses. Bank of Canada (BoC) data shows the allowance for credit losses due to mortgages reached a record high in Q3 2020. The record was reached with the biggest surge in the annual rate of growth since the Great Recession.

Today’s data point is the allowance for credit losses, specifically for mortgages. You might have already guessed what this is – the amount banks set aside in the event of non-payment. When lenders expect a loan has become unrecoverable, they have to add more money to this pile. We’re going to be looking at the aggregate amount across all lenders.

The amount set aside for losses has climbed to a new record high, and is growing unusually fast. Allowances reached $3.9 billion in Q3 2020, up 22.01% from the previous quarter. This represents an increase of 54.11% when compared to the same quarter last year. It’s not just a record high for dollars, but also the highest rate of growth in over a decade.

Biggest Growth Loss Allowances Since Great Recession

Mortgage loss allowances at Canadian lenders grew at the fastest pace since the Great Recession. There’s been consistent growth since 2018, but the annual rate of growth has been tapering. That is, until the most recently reported quarters. Both Q2 and Q3 in 2020, showed a very large surge in growth. It was Q3’s annual growth that was the largest print since 2009 though.

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Real Canadian Mortgage Credit Growth Is Pointing To An Early 80s Style Meltdown

November 14, 2018

Real Canadian Mortgage Credit Growth Is Pointing To An Early 80s Style Meltdown

Canadian mortgage credit growth is falling, but how bad is it in real terms? People are comparing today’s low growth numbers to the mid-1990s. While there are some parallels, it more accurately resembles the early 1980s. Mortgage credit growth, when adjusted for inflation, is heading towards negative numbers. We haven’t actually experienced negative real growth in over 30 years.

Why Real Mortgage Credit Is Important

In order to more accurately observe trends, analysts will sometimes inflation adjust dollar amounts. Inflation is the decrease in power of money, caused by rising or falling prices in goods. Inflation tends to obfuscate the true trend over long periods of time. Did the currency go to s**t, or did we see a behavioral change? Was it low growth, or negative growth? To get a better picture, it’s sometimes (almost always) useful to adjust for inflation. When numbers are adjusted for inflation, they’re called real numbers.

Looking at real numbers allows us to observe the trend, without the distortion of currency value at the time. This is particularly important when looking at the early 1980s for Canada. During that period, inflation was totally out of control. Today we often think of that period as low growth, with a brief negative contraction. In actuality, it was a very large contraction in real terms.

Okay, no one thinks about the early 1980s rate of credit growth, but some of you should!

Canadian Mortgage Credit Growth Is Over 3%

Canadian mortgage credit growth is pretty weak when looking at unadjusted numbers. The annual pace of growth fell to 3.38% in September, down 38.76% from last year. This is the lowest pace since June 2001, and on target to head lower according to recent performance. It’s low growth, but at least it’s not negative is what most are thinking.

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Canada Has A Subprime Real Estate Problem, You Just Don’t Know It

June 16, 2018

Canada Has A Subprime Real Estate Problem, You Just Don’t Know It

A few weeks ago, a real estate agent told me about his client. Relatively wealthy older dude, closed on not one but two townhouses he plans on flipping. After some questions regarding who financed such a deal, he explains it was a private lender. Right before adding, “don’t worry, it’s not like in the US. This guy has good credit, he just couldn’t get enough money from his bank.”

I realized that people aren’t lying when they say Canadian real estate is nothing like the US in 2006. Canadians just don’t understand what happened during the US subprime crisis. They also don’t really understand subprime lending is alive and well in Canada, we just use different names.

Subprime Borrowers Vs. Subprime Loans

First, a quick lesson on subprime. The S-word is a dirty word in Canada, so there’s little discussion about what it means. Most people think “broke ass borrower” when they hear the term, but that’s not always the case. There’s subprime borrowers and subprime loans.

Subprime loans are any loans that are below prime, as in the typical lending criteria isn’t met. The part that’s poorly understood is a borrower, a loan, or any combination of those can be subprime. A borrower with excellent credit, might want a subprime loan. This happens more often than you think, and is usually because a bank won’t lend as much money as needed. No one thinks of a family in a nice neighborhood with a private loan to buy their fourth or fifth condo as subprime, but they are.

Don’t worry, it’s not just average people that don’t understand this. There’s still a lot of confusion about the issue in the finance community around the US subprime crisis. Most people knew subprime lenders blew up, and naturally blamed poor people and immigrants with low credit scores, as is the way.

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BoC: 8% Of Canadian Households Owe More Than 20% Of The $2.1 Trillion In Debt

May 7, 2018

BoC: 8% Of Canadian Households Owe More Than 20% Of The $2.1 Trillion In Debt

BoC - 8% of Households Owe More Than 20% of The $2 Trillion In Canadian Debt
Canadian real estate debt hit a new high, and the news gets worse as they explain it further. The Bank of Canada (BoC) updated household debt numbers for March. In a speech this week, BoC’s Governor Stephen Poloz also gave further insights on the numbers. The record debt levels are concentrated in a smaller segment of Canadians. These Canadians are now in a “highly vulnerable” position, and they’re f**ked if they don’t start preparing for higher rates now.

8% Of Canadians Have Mortgage Debt Over 3.5x What They Make

In a speech this week, the BoC gave us further insights on the Canadian debt problem, and it’s worse than we thought. It turns out 8% of households have mortgage debt that’s more than 350% of their gross income. This segment of borrower represents “a bit more than 20 percent of total household debt.” BoC Governor Poloz stressed that these households need to understand how “personally vulnerable” they are, as rates rise.

Rising rates are already putting the pinch on households, and it should get worse. The BoC reiterated the “neutral rate,” which is the rate where policy is no longer expansionary, is between 2.5% and 3.5%. Assuming no “shock” to the economy, rates will get there. Currently we’re at 1.25%, so that would mean rates will double over the next few years. You know, if we don’t face a major recession. Then you’re in the clear on rates, but a whole other bag of issues will crop up. On that note, onto those climbing debt numbers.

Canadian Households Owe More Than $2.1 Trillion Dollars

Total household debt hit a new record, but the annual pace of growth continued to decline. The total balance at the end of March stood at a whopping $2.129 trillion, up $3.4 billion from the month before. The annual rate of growth is now 5.25%.

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Congrats! Canadians Just Set A New Record For Borrowing Against Their Homes

April 21, 2018

Congrats! Canadians Just Set A New Record For Borrowing Against Their Homes

Congrats! Canadians Just Set A New Record For Borrowing Against Their Homes
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.

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Teranet: Canadian Real Estate Prices Drop Most In 7 Years, Led By Toronto

October 25, 2017

Teranet: Canadian Real Estate Prices Drop Most In 7 Years, Led By Toronto

Teranet Shows Canadian Real Estate Drops Most In 7 Years, Led By Toronto

Canadian real estate prices may be softening. Numbers from Teranet show that home prices generally declined across the country in September. This decline is led by a drop in prices around the Greater Toronto Area, extending through the Greater Golden Horseshoe. Although not all markets saw decline. Vancouver is once again leading the 11 city composite index in monthly price gains.

Who The F**K Is Teranet, And Why Should I Care?

Teranet is a land registry behemoth that operates, amongst other things, the land registries in Ontario and Manitoba. They build a Home Price Index with National Bank of Canada, that uses land registry data to compare how prices on the exact same house evolve over time. That is, they only use homes that have been sold more than once. This is known as a “sales pair” analysis, and is the kind of the stuff common in the US.

One of the the things they produce is an index for 11 cities, which they combine in an urban index. It’s debatable if it’s more or less accurate than CREA’s urban index. However, if you’re into national housing stats – you should be checking out both.

Canadian Real Estate Prices See Largest Drop Since September 2010

The Teranet National Composite House Price Index fell in September. The index experienced a 0.8% drop when compared to the month before. National Bank of Canada analysts noted this is the largest drop since September 2010. This is also the first time the 11 city composite has dropped since January 2016. While a single  drop isn’t a huge concern, the first after a long trend should be noted.

 

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Canadians Are Borrowing Against Real Estate At The Fastest Pace Ever

September 4, 2017

Canadians Are Borrowing Against Real Estate At The Fastest Pace Ever

Canadian real estate prices have soared, and so did borrowing against that value. Our analysis of domestic bank filings from the Office of the Superintendent of Financial Institutions (OSFI) shows that loans secured against property has reached an all-time high. More surprising is the unprecedented rate of growth experienced this year.

Total Canadian Loans Secured Against Residential PropertyJan 2012Jul 2012Jan 2013Jul 2013Jan 2014Jul 2014Jan 2015Jul 2015Jan 2016Jul 2016Jan 2017$240$260$280$300$320Canadian Dollars (in Billions)

Month Total (in billions)
Jan 2012 252.67
Feb 2012 251.43
Mar 2012 268.75
Apr 2012 255.17
May 2012 258.07
Jun 2012 260.07
Jul 2012 258.96
Aug 2012 259.64
Sep 2012 261.66
Oct 2012 263.1
Nov 2012 262.24
Dec 2012 262.69
Jan 2013 257.82
Feb 2013 259.97
Mar 2013 259.22
Apr 2013 261.72
May 2013 262.22
Jun 2013 262.91
Jul 2013 260.75
Aug 2013 261.77
Sep 2013 260.87
Oct 2013 261.99
Nov 2013 262.54
Dec 2013 262.57
Jan 2014 265.15
Feb 2014 264.87
Mar 2014 263.4
Apr 2014 263.78
May 2014 265.75
Jun 2014 265.91
Jul 2014 267.76
Aug 2014 267.97
Sep 2014 269.29
Oct 2014 269.57
Nov 2014 269.45
Dec 2014 273.93
Jan 2015 277.08
Feb 2015 281.41
Mar 2015 282.17
Apr 2015 278.67
May 2015 280.8
Jun 2015 284.45
Jul 2015 285.66
Aug 2015 283.94
Sep 2015 285.85
Oct 2015 283.14
Nov 2015 286.56
Dec 2015 286.92
Jan 2016 285.29
Feb 2016 283.87
Mar 2016 282.05
Apr 2016 279.04
May 2016 282.34
Jun 2016 282.16
Jul 2016 283.65
Aug 2016 285.6
Sep 2016 286.17
Oct 2016 290.61
Nov 2016 291.01
Dec 2016 290.62
Jan 2017 293.46
Feb 2017 296.34
Mar 2017 297.14
Apr 2017 301.02
May 2017 303.26
Jun 2017 313.67

Total balance of loans secured against residential real estate across Canada, as determined through regulatory filings from all domestic banks. Source: OFSI, Better Dwelling.

Canadians Borrowed Against Over $313 Billion In Real Estate

Loans secured against residential real estate shattered a few records in June. Over $313.66 billion in real estate was used to secure loans, up 3.43% from the month before. The rise puts annual gains 11.16% higher than the same month last year, an increase of $31.51 billion. The monthly increase is the largest increase since March 2012. The annual gain is unprecedented according to an aggregate of domestic bank filings.

 

 

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