Canadians Are Pulling Back On Borrowing… Why?

Household credit market borrowing slowed slightly to $25.1 billion. The slowdown was largely driven by a decline in consumer credit lending, which fell from $7.8 billion in the first quarter to $4.0 billion in the second quarter, StatCan noted.

However, mortgage borrowing saw a slight rise in the quarter to $18.3 billion, up from the $17.3 billion recorded in Q1.

“High interest rates are working, as the advance in household consumption is slowing down, which is the intent of restrictive monetary policy,” noted Randall Bartlett, Senior Director of Canadian Economics at Desjardins.

But he cautioned that the Bank of Canada “faces an ambitious task of achieving a soft landing given present vulnerabilities and future headwinds.”

One major concern is the additional strain on mortgage holders, with a significant wave of renewals approaching. As of May, the Bank of Canada estimated that around half of mortgage holders had yet to fully experience the effects of higher interest rates.

“Once these households experience a mortgage renewal, they will face significantly greater financial strain because of higher monthly payments,” Bartlett wrote.

He also highlighted increased financial stress among non-mortgage holders, who are exhibiting “a growing reliance on credit card debt to fuel their purchases.”

Here are some other highlights from the Q2 national balance sheet and financial flow accounts:

• Household net worth edged up to $42.4 billion (+0.2% QoQ).
• The household debt-service ratio, which measures the portion of disposable income used for principal and interest payments on credit market debt, rose to 14.97% from 14.89% in Q1.
• The mortgage-only debt service ratio reached a record high of 8.18% in Q2, up from 8.07% in the first quarter.
• The household savings rate rose 7.2% as growth in disposable income outpaced the rise in spending.
• Real estate activity in Q2 was the weakest in four years, leading to a slight 0.1% drop in the value of household residential real estate since Q1 and a 0.3% decline year-over-year.
• Real estate accounted for nearly 43% of the value of total household assets.

Toronto’s new home sales hit an all-time low in July

According to the Building Industry and Land Development Association (BILD), only 654 new homes were sold in the Greater Toronto Area (GTA), a sharp drop of 48% year-over-year and 70% below the 10-year average.

Single-family home sales plummeted by 84%, while condominium sales dropped by 62%.

This slowdown in sales led to a significant rise in inventory, with 15 months’ worth of available homes now on the market. This means it would take 15 months to sell all current listings at the current pace of demand.

“GTA new home sales in July 2024 sank to another record monthly low as buyers remained unwilling to leave the sidelines,” said Edward Jegg, research manager with Altus Group.

“Further expected decreases in interest rates in the coming months along with elevated inventories means there will be plenty of opportunities once consumer confidence improves,” he added.

In July, 287 condominium units, including apartments, stacked townhouses, and lofts, were sold, down 67% from July 2023 and 81% below the 10-year average. Single-family home sales totalled 367, a 1% drop from last year and 42% below the 10-year average.

BoC’s Macklem says deeper rate cuts could be warranted

Bank of Canada Governor Tiff Macklem recently hinted at the possibility of deeper interest rate cuts if inflation continues to cool and economic vulnerabilities grow.

During a question-and-answer session in the UK, Macklem emphasized that the central bank’s priority remains controlling inflation, but acknowledged that more aggressive rate cuts could be necessary in 2024 to ensure a balanced recovery.

“We now have some slack in the labor market,” he said. “With inflation getting closer to target, we actually want to see growth pick up. We want to see consumer spending strengthen.”

Mortgage snippets

• Canadian building permits surged 22.1% in July: Building permits rose to $12.4 billion after two months of decline, according to Statistics Canada. Residential permits rose 16.7% to $7.6 billion, driven by a 29.3% increase in multi-unit permits, while single-family permits dipped 1.9%.

  Non-residential permits jumped 31.8% to $4.8 billion, with Ontario and British Columbia leading the gains. Ontario saw a 23.8% rise, and B.C. experienced a significant 99.2% increase. Nationwide, permits were issued for 20,700 multi-unit and 4,100 single-family dwellings, bringing the 12-month total to 266,200 new units.

• Some first-time buyers can now extend their amortization to 30 years…but should they? That’s the question tackled in this Toronto Star article. While a longer amortization can help with affordability in the form of lower payments, experts warn that it comes with a catch—paying more in interest over time. It’s a trade-off between short-term relief and long-term costs.

  “It’s dangerous window dressing because it sets an expectation that your first home should be brand new and that if you can’t afford a 25-year amortization, affording it on a 30-year amortization makes it okay,” noted Colin White, portfolio manager and CEO of Verecan Capital Management. “In a lot of cases, it’s nice to be entering retirement, or the next phase of your life, when your debt servicing years are behind you.”

• RBC names new finance chief amid legal dispute with former CFO: Royal Bank of Canada (RBC) has appointed Katherine Gibson as its new Chief Financial Officer, following the departure of Nadine Ahn, who is currently involved in a legal dispute with the bank.

  Ahn, who left the role earlier this year, is suing RBC for wrongful dismissal, while the bank has accused her of misconduct. Gibson, who has been with RBC for several years, takes over as the bank navigates both the ongoing legal battle and broader economic challenges.