Regulatory filings indicate that Canadian homeowners are becoming more cautious about spending their recent windfall from home equity. In January, the outstanding balance of home equity line of credit (HELOC) and all other types of home equity borrowing showed a significant monthly decrease. It is possible that the combination of declining home values and increasing interest costs has led to a reduction in the use of paper gains. Nonetheless, this deceleration is comparatively small when compared to the amount of debt amassed in recent times.
Canadian HELOC Debt Fell $1.4 Billion In A Month
The borrowing trend for Canadian HELOC debt has slowed down due to the rise in interest rates. The outstanding balance for HELOC debt decreased by 0.8% or $1.4 billion to $169.0 billion in January. This was the largest monthly decline in two years and marked the fourth consecutive month of reduction. The balance has now returned to its April 2022 levels.
The previous surge observed in this type of borrowing appears to be cooling down quickly. In January, the annual growth rate dropped to 2.1% or $3.5 billion. It seems that the growth in HELOC borrowing peaked during a brief period in August 2022, which was short-lived.
Home Equity Loans In General Have Begun To Contract
Based on the figures provided above, it appears that HELOC loans are not a significant concern. This contrasts with warnings that have been issued by some regulators about home equity loans. However, this is due to the narrow definition of HELOC, which excludes other types of home equity loans.
Fixed repayment terms or loans combined with mortgages are not included in the HELOC category. Many individuals who believe they have a HELOC actually have a home equity loan. When all types of home equity debt are taken into account, the situation changes significantly.
When all outstanding personal loans backed by home equity are included, the balance nearly doubles to $307.1 billion for January, which is about 88% more than just HELOC debt. Despite this, the balance fell by 0.7% or $2.3 billion in the month, bringing it to its lowest level since August 2022. Whenever a single month is capable of reversing six months of growth, it is worth paying attention to.
Home equity borrowing has slowed down, but only after a substantial surge in borrowing that usually accompanies rapid price growth. During this time, borrowers tend to spend their paper gains. The emphasis on HELOC data disregards the significant liability generated by the rush to cash in.
While it may appear to be good news that highly indebted households are paying down some of their debt, the main concern is that credit growth has been a driving force behind economic growth. As this credit is repaid, the boost it provided is lost, which could potentially add another obstacle to the country’s economy.
