Tuesday, April 29, 2014


HELOC, or Home Equity Line of Credit, is an access to funding that turns your home into a piggy bank.

As the Canadian real estate bubble has inflated, many Canadians have turned to the 'home piggy bank' and borrowed like… well… pigs.

How bad is it?

Macleans Magazine had a March 22, 2014 article titled Living Beyond Our Means: Extravagant, reckless, debt-ridden—Canadian consumers have maxed themselves out after a decade-long spending spree. When did we start to be like Americans?

Macleans notes:
At the end of 2013, according to the Office of the Superintendent of Financial Institutions, Canadians had borrowed $225 billion through home-equity lines of credit (HELOCs)—a figure that doesn’t even include loans from credit unions and other lenders. 
$225 Billion!!!

How significant is that figure?
That’s just less than half the US$500 billion Americans owe in HELOC debt. But America is a far larger economy. Down there, HELOCs amount to 2.9% of GDP, and only reached 5% at the peak of the U.S. housing bubble. In Canada, though, that figure is 14%, and is up from 12% in 2012, showing that even though Canada’s economy has grown, the pace at which homeowners tapped their properties for cash grew even faster.
The impact of these numbers can't be understated.

Had Canada's housing bubble been allowed to deflate when the financial crisis originally hit in 2008, the effects would have been very painful.  But all we have done is delay the pain. And in the meantime… the problem has compounded as Canadians have pigged out on debt at emergency level interest rates.

It is going to make the pain far worse when the inevitable happens.


Email: village_whisperer@live.ca
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  1. Fully agree and think the correction when it finally arrives will be in the range of 50%. Since 2008 Canadians have become so smug about our superiority to the US and have had it reaffirmed that no crash will happen here (despite all the manipulation that kept real estate going up). It seems people feel they can buy without much thought to the price because it will all work out well despite all the warnings bears have been voicing for years (which have been wrong so far).

  2. It is certainly true about our smugness. However whether the correction is 50 or 5% this is real money that comes out of your pocket. Oh, right, it appears that the buyers of today don't see it that way.

    If there is value in your home or investment then you should spend against it right away. Not anything valuable or secure, rather a luxury or "wanna have" item. Sooner rather than later this is not going to end well...... except for us waiting to vulch properties in a few years in a flailing market, patience, patience.

  3. Looks like Canadians have not learned any lesson from the U.S. real estate debacle. As a matter of fact, we have out-done the Americans in terms of our HELOC debt. There'll be hell to pay -- just ask any American about the recession of the past 6 years. Oh wait, it's different in Canada! Never mind!

  4. Along with being financially suicidal out of general , Canadians are also completely innumerate...none of these figures mean anything to them, They can cope with life only on the condition that "there will be no math questions".

    Even after they are eventually torpedoed, their only reaction will be "The government should do something about this!"

    Ummmmmm......that's the problem. They did.

  5. I agree that the correction will be profound - but maybe not anywhere close to 50% (as much as I'd like to see it). The size of the correction will depend on the interest rates and the amount of debt the banks will extend to the mortgagees. I suspect that we'll have a 20-30% correction and then continued defaults as the banks tighten the leash squeezing mortgagees into default or bankruptcy. Some of the prices may go down to 50% as the mortgagees try to escape the bank's noose. Should be interesting.

  6. WOW, we are in alot more trouble than I thought. A correction is definitely due and its probably going to be far worse than what happened in the U.S. I just hope a correction starts before the next election so people realise how bad the Conservatives are at running the economy.

  7. It's always the same.

    It's always this repetitive story of doom and gloom with the Whisperer speaking as if a sage, while the rest of the economists and mortgage holding public are fools.

    But month after month and year after year goes by and the doomsday predictions continue to fall flat.

    But I suppose if someone shouts that there is a terrible storm coming over and over again for vast periods of time, eventually they'll get it right.

    Eventually a storm does come.

    It's a pity that those that listened to the message from the start have unfortunately missed so many years of sunny weather.

    1. You posted the same thing on G. Turners blog. Do you get tired of repeating yourself?

    2. Who is G.Turner?

    3. Never. As the message is still correct and worth having others ponder.

      I think the more interesting observation is how you gravitate to these doomsday blogs in order to validate your negative premise. How pathetic.

    4. "...while the rest of the economists ..."

      Are saying that Robert Shiller (recent Nobel Prize winner) has changed his mind?

    5. "... while the rest of the economists ..."
      You mean Robert Shiller, the nobel winning economist, has changed his mind?

  8. Those who need to sell now or in the very near future, and who bought in the last few yrs, will not be seeing any "sunny weather"

  9. Well, Michael took the words right out of my keyboard. Just checked in after a couple of weeks. I have been following your blog since the MacLean's
    "skyscraper and house on fire" cover story a few years back and I would have to agree that this site is on a bear hunt. Unfortunately, although I too have recommended caution to my clients, I have not yet found a way to sell short securitized real estate with a local target. I might have done so in certain areas in Richmond during 2011-2013.... and then closed out my position. So, in the absence of a way to do that, other than trying to save souls from homeownership given the bear opinions expressed and supported here, I have not read any sharp ideas for investing what the reader shouldn't put into the real estate market.

    I fully agree that speculative real estate investment with a hope of simply "flipping" constituted a risk far higher in recent years than it did in the five years before that. However, it has long been said that if an economic forecast doesn't work out, simply extend the time frame for that eventuality.

    So far, the numbers as represented by the foreclosure rates have not lent credence to the bear position, as they are so low across the board in the Lower Mainland, even including Whistler, which as recreational property would be the first to get the gavel. But it has just not happened; it is NOT happening, and if it is going to happen and somebody wants to claim credit for making the call, please feel free to post the date, because the Ides of March has come and gone!

    I just published a full foreclosure report of listings subject to court ordered sale and you can see the numbers for yourself at:http://www.shuchatgroup.com/Blog.php/foreclosure-report-richmond-vancouver-nroth-vancouver-west-vancouver-whistler

    There is scant evidence of a bubble crisis in the real estate market based on listings and court ordered sales. Perhaps tighter credit will squeeze prices, but I do not see the effect of post 2011 tightening on the price levels today, albeit volume has come down. For the most part, I think the effect was to squeeze the "frenzy" out and I think it worked and has been beneficial.

    1. "... bubble crisis in the real estate market based on listings and court ordered sales. .."

      Yes these are all evidence of a bubble collapse. That doesn't mean that there isn't a bubble.

    2. Arnold, maybe you know the answer to this? I have seen a lot of finished residential construction that is not listed on MLS, and has stayed off for months and month, in some instances years. It's almost as if the developers don't want people to know that there is more inventory available. It makes me question what the true inventory numbers are where there is clear overbuilding.

    3. I am surmising that it more likely has to do with qualifying for the principal residence exemption. People are under the impression that just because it is a house and they live in it, it is exempt from capital gains tax. However, to be exempt, it first has to be capital property, i.e. property held for a "lasting and enduring benefit", and NOT inventory, or a build and flip situation. Were a builder to go for the sale as soon as he was able, and listed the property on MLS right away, it would certainly be viewed as Inventory or an adventure in the nature of a trade and the entire profit (if any) would be taxable.... (the listing in and of itself would be evidence of intention to sell and not to hold)
      Secondly, no doubt that builder might also have GST issues were it mishandled... so I believe they are being very cautious. In many cases the property owner does a deal with the builder and the property does not change hands for at least a year and subsequently, the owner claims the gain (if any) as a tax free principal residence exemption, and then pays out the builder. It is not exempt, but I doubt they don't treat it that way in many cases.... dangerous waters to swim in...

  10. I'm just curious. Can anyone explain the following hypothetical situation:

    1) What happens if my mortgage is greater than the assessed value of my home? For example, my mortgage is $500K and my home is assessed at $400K, but as long as I can make my payments, the bank cannot do anything, right?

    2) Will it affect my heloc if I now have negative equity as in situation (1) above?

    3) Same situation as (1), but now I want to sell my home at the assessed value. What will the bank do? What happens to the heloc?

    Seeking Knowledge...

    1. I can recommend a good mortgage broker that can assist you with these questions...

    2. (1) As long as you can make the payments you are OK. When it comes time to refinance and if the assessed value is still lower than the mortgage, the bank will require you to come up with more cash to pay down the mortgage.

      (2) If you have negative equity, the bank can declare balance due and cancel your HELOC in a moment's notice, depending on the specific terms and conditions of the HELOC agreement.

      (3) If you sell the house at assessed value of $400K, and the mortgage balance is $500K, then you owe the bank $100K. Unless you pay back the bank $500K, they will not release the lien and you cannot close of the sale.

  11. (c) ......close on the sale. (Fat fingers!!!)

    1. Thanks for the concise and helpful explanation.
      I guess if I was a home owner whose mortgage is higher than my assessed value, I will continue with (1) because interest rate is so low (i.e., low monthly payments) and I really cannot execute (3). I wonder if there are many in this kind of situation where they can't afford to sell.

      Seeking Knowledge...

    2. Depending upon where they live, probably most of the people who bought between Nov 2010 and March 1 of 2011.