Homeowners in Canada’s hottest housing markets are taking advantage of rising property values to go on spending binges, according to National Bank of Canada, the nation’s sixth largest bank.
“The sharp appreciation in home prices in Ontario and British Columbia, fueled by extremely accommodative monetary policy, have undoubtedly encouraged some homeowners to tap into their home equity in order to support a spending binge,” said Stéfane Marion, chief economist and strategist at National Bank of Canada.
In Canada, there are currently about three million active home equity lines of credit (HELOCs), according to National Bank, citing data from the Financial Consumer Agency of Canada.
On average, the outstanding balance on Canadian HELOCs is $70,000, and these types of loans account for about 45% of consumer credit.
Rather worryingly, there has been an increase in this type of consumer debt. “We estimate that HELOCs at Canadian chartered banks have surged by close to $20 billion in the past year, accounting for close to 60 per cent of the growth in total consumer credit,” Marion said.
Households taking advantage of HELOCs are fueling a broader borrowing frenzy, said National Bank. During the last quarter, consumer credit grew at its fastest rate since 2010.
While National Bank doesn’t examine what Canadians are spending their HELOCs on, earlier this year, one Toronto-based mortgage agent told BuzzBuzzNews that homeowners are increasingly using their HELOCs to help their children finance their own home purchases.
Overall, the racking up of consumer debt is extremely risky, National Bank warned. While it supports near-term GDP growth, increased debt, including HELOC debt, poses risks to the financial system’s stability and undermines the financial well-being of individuals.
“So, the resurgence in consumer credit may ring some alarm bells at the Bank of Canada which, as you may recall, continues to see household indebtedness and housing market imbalances as ‘the most important vulnerabilities for the Canadian financial system,’” Marion said.
Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate