Housing Market Debt

In our last article we estimated the potential value of Canada’s housing market to be $7.5 trillion.  This post will look at the current levels of debt borrowed to support the hot housing market and how these figures compare to the estimated value.

As a reminder, we calculated the value of the housing market by multiplying the number of private dwellings in Canada by the average house price.  As shown below, this process enabled us to show that Canada’s housing market has grown from roughly $4 trillion in 2008 to $7.5 trillion in 2018.

For Canada

Year Home Prices Total # of Dwellings Total Market Value
2008 $300,000 13,576,855 $4,073,056,500,000
2018 $487,000 15,412,443 $7,505,859,741,000

What has also grown over this period is Canada’s level of mortgage debt.  This number has also nearly doubled over the past ten years from just over $850 billion to $1.5 trillion.

Canadian Mortgage Debt

Year Total Debt

$   854,066,000,000

2018 $1,520,000,000,000

(Source: Better Dwelling)

Comparing these numbers we can see that while total value has grown by 84% over the last decade, mortgage debt has almost kept pace rising 78% itself.  This is significant because while the value of the housing market could go up or down, mortgage debt remains on a relatively fixed payment timeline.  Meaning regardless of whether or not the housing market holds its value, Canadian mortgage holders will still owe that $1.5 trillion.

It is important to know that mortgage debt is not the only kind of housing market borrowing taking place by home owners.  Home equity lines of credit (HELOC) are also well used financing options that currently total a significant withdrawal from the housing market.  In July, HELOC borrowing equalled nearly $290 billion throughout the country (Source: Better Dwelling).  HELOC debt has not risen as quickly as mortgage debt or the value of the market; however, the total amount owed has increased by $50 billion in the last five years.  Adding this debt to the mortgage figure, borrowing against the housing market passes over $1.8 trillion.

The final borrowing option we will raise is a reverse mortgage.  At only $3 billion in total debt through July 2018, reverse mortgages appear to be small compared to the broader market.  While this may be true, it is the speed that this option is growing that is worth keeping an eye on.  In just the past six years, reverse mortgage borrowing has tripled from $1 billion to $3 billion (source: Better Dwelling).  Monitoring this borrowing option could begin to show that an increasing number of home owners are not waiting to sell their house too benefit from its price gains.

All of these forms of debt matter because while the housing market may be strong now, if a down turn were to happen we would be at risk due to the increasing amounts of financial leverage people are using their homes for.  A 5, 10 or 20% drop in housing values can instantly remove billions or possible more than a trillion dollars from the market, but unfortunately, debts do not get erased as easily.

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