Canada's home equity spree may have grave consequences down the line

HELOCs represented the vast majority of the home equity drawn last year

Canada's home equity spree may have grave consequences down the line

While the hundreds of billions of dollars of home equity extracted by Canadians over the past few years have helped strengthen consumption and the economy, these also have potentially disastrous effects, market observers warned.

The danger especially increases when people continue to extract home equity while home prices grow.

“This is a problem if the collateral effect contributes meaningfully. If home prices fall, the equity-based spending disappears. Combine that with slower sales, which leads to lower spin-off economic activity,” Better Dwelling reported in its analysis of figures from the Bank of Canada.

“A decline in home prices is no longer just a hit to paper-based wealth. It has a significant impact on the general economy, and employment,” the real estate think-tank added.

BoC data showed that over the past six years, Canadians have extracted approximately $477.5 billion in home equity.

And while the $83.1 billion volume in 2018 was 6.62% lower than the year prior, the overall annual level has never been lower than $80 billion since 2015,

HELOCs accounted for a vast majority of last year’s equity extraction: as much as $46 billion in HELOC credit was drawn in 2018, across nearly 1.9 million accounts (4.43% fewer annually).

Meanwhile, $37.1 billion was through refinancing, with 296,000 homeowners taking advantage of this extraction (down 10.27% year-over-year).