For decades, mortgage credit has been a cornerstone of Canada’s housing market and broader economy. Today, we find ourselves at an inflection point: credit levels have soared to unprecedented heights, yet growth is slowing. What does this mean for Canada’s future housing market and economic stability?
Let’s dive into the data and explore the trends defining Canadian mortgage credit’s secular story.
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A Journey Through Time: From $15 Billion to $2.2 Trillion
In 1969, Canada’s total mortgage credit stood at a modest $15 billion. Fast forward to September 2024, and that figure has exploded to over $2.2 trillion. This exponential growth reflects the increasing reliance on debt to fuel home purchases, development, and wealth creation.
Yet beneath this impressive growth lies a deeper story: the rate at which credit expands has been in steady, secular decline.
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The Declining Rate of Growth
The 12-month rate of change in mortgage credit tells a crucial story. Here are the major milestones:
– 1977: A peak in credit growth at 22.4% annually, coinciding with the inflationary pressures of the 1970s.
– 1988: Another high at 18%, driven by robust economic growth and housing demand.
– 1995: Growth slows to just 2.9% as Canada wrestles with high interest rates and fiscal tightening.
– 2007: Credit growth hits 12%, reflecting the housing boom before the global financial crisis.
– 2021: A post-pandemic surge pushes growth to 10.3% as cheap money fuels a housing frenzy.
– 2024: As of September, the growth rate is just 3.5%, the lowest in decades, reflecting higher interest rates and stretched affordability.
The secular decline in the growth rate is evident, as the downward-sloping red trendline highlights. Despite occasional surges during economic booms, the long-term trajectory suggests that the rapid mortgage credit expansion era is fading.
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The Exponential Debt Curve
While the growth rate declines, the absolute level of mortgage debt continues to rise, following an exponential trajectory. The green trendline in the chart highlights this dynamic: Canada’s housing market remains heavily reliant on increasing debt levels to sustain itself.
However, this reliance on credit raises an important question: How much more debt can the system absorb before hitting structural limits?
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What’s Driving the Decline in Growth Rates?
Several factors contribute to the secular slowdown in credit growth:
1. Rising Interest Rates: Central banks have tightened monetary policy after a decade of near-zero interest rates. Higher borrowing costs make it harder for households to take on new debt.
2. Housing Affordability Crisis: Home prices in many Canadian cities have reached unaffordable levels for average buyers, limiting the pool of potential borrowers.
3. Demographics: Canada’s aging population means fewer first-time homebuyers entering the market, reducing the demand for new mortgages.
4. Debt Saturation: With mortgage debt already at $2.2 trillion, many households are reaching the limits of their borrowing capacity. The focus is shifting from new borrowing to debt servicing.
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What Does This Mean for Canada’s Future?
The secular trends in mortgage credit suggest a maturing credit cycle. Here are some potential implications:
1. A Slower Housing Market: With credit growth slowing, the housing market may enter a period of stagnation or slower price appreciation. This could ease affordability pressures but also weigh on economic growth.
2. Debt Overhang Risks: Elevated debt levels leave households and the broader economy vulnerable to shocks, such as rising unemployment or further interest rate hikes.
3. Policy Dilemmas: Policymakers face a delicate balancing act. On one hand, they need to address affordability and financial stability, while on the other, they must be cautious not to trigger a housing downturn.
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The Big Picture: A Transition in the Era of Credit
Canada’s mortgage credit trends tell a story of transformation. While rapid credit expansion and surging home prices have defined the last few decades, the future may look different. Slower credit growth and high debt levels could mark the end of an era of easy money and endless appreciation.
Understanding this shift is crucial for policymakers, lenders, and homeowners. The housing market remains a key pillar of Canada’s economy, but the dynamics are changing. In this new era of credit, caution, adaptability, and long-term planning will be more important than ever.
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What are your thoughts on Canada’s mortgage credit trends? Is this the beginning of a fundamental shift or just a temporary slowdown? Let me know in the comments!
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