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June 7, 2017 | The Sleeper

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


If residential real estate continues to lay an egg, first in TO, then everywhere else, you might be getting a margin call on your house.

Home equity lines of credit are huge. There are thirteen million households in Canada, and three million of them have HELOCs. That’s 23% of the population. Sheesh. And of those people, 40% don’t make regular payments. By the way, eight in ten have their lines of credit linked to the mortgages, which means their available credit grows with every payment.

The amount of debt that residential real estate has credit is without precedent. Two-thirds of the $2 trillion we owe are mortgages, and billions more are lines of credit backed by houses. In the latest three-month period for which we have stats, mortgage debt rose 7% while lines of credit bloated by eight times. Most of that debt came in the form of HELOCs, which are backed by homeowner equity.

So what? Why’s it even remotely interesting to have more evidence Canadians are undisciplined, credit-snorfling debt addicts?

Well, if what happened in the GTA last month keeps on happening for a while (prices down 6%, sales lower by 20% and listings up by half), a lot of the people with HELOCs might be surprised. It’s important to understand a home equity line of credit is a demand loan. There is no term for it – in theory it goes on forever – but the lender can demand payment in full at any time, and for any reason. The interest rate isn’t fixed, but floats with the prime rate, and can be raised by the lender if conditions change.

Banks are allowed to lend up to 65% of the equity in a property as a HELOC and in return for doing so, have a charge against your deed. So you can’t sell the property without triggering full repayment of the debt. It’s possible to borrow up to 80% of your equity (and lots of people so) but the final hunk needs to come as an amortized mortgage. So, you’re forced to make blended payments (principal and interest) on that portion, but on the main amount all you need do is pay enough interest so your loan limit isn’t breached.

And that’s what most people do. A quarter make interest-only payments and, as mentioned, 40% don’t make any until they hit the credit limit.

Now all of this moist, fecund, multiplying, spreading, heady pile of debt was no issue while everybody’s equity was going up with real estate values romping higher. Fatter prices made the debt look skinnier. Sleeper debt. Homeowners could ignore it. The bankers were happy. Everybody kept piling on.

But those days may be ending. If we have, say, four more months of 6% declines then it’s conceivable average equity could fall by a third, putting a mess of borrowers offside with their loan-to-value ratios. More important, if the banks start getting nervous about declining equity and the quality of the massive loans they’ve made against it, they might start demanding some of it back.

Imagine what a shock that would be for someone whose house is falling in value. They could be asked to reduce their HELOC balance by $10,000 or may $100,000 – triggering them to sell their home into the teeth of a declining market. If enough households were affected, the market plop could be made that much worse by sellers without options.

This is not a remote worry. On Wednesday an agency of the federal government raised the alarm (finally) saying: “Falling housing prices may constrain HELOC borrowers’ access to credit, forcing them to curtail spending, which could in turn negatively affect the economy. Furthermore, during a severe and prolonged market correction, lenders may revise HELOC limits downward or call in loans.”

In 2000, Ottawa reminds us, home equity loans totaled $35 billion. In 2012 they were $186 billion. Now we are over $200 billion – an annual swell of about 20%. A third of these loans were used to invest in more real estate (much of it through the Bank of Mom) and 40% of the total went into renovating houses or was piddled away on consumer spending.

Yes, I know. Blah, blah, blah. Debt, debt, debt. It’s boring.

But when 23% of all households owe $200 billion, much of it spent and gone, are making no payments and could blow up if their loans are called, we have a timebomb ticking. Of course, the first HELOCs for which repayment is demanded will be those on which no regular payments are being made.

That wouldn’t include you, would it?

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June 7th, 2017

Posted In: The Greater Fool

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