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Crunch looms as house correction puts some Canadians under water
[OTTAWA] A drop in Canadian home prices has put some recent buyers under water, particularly in Toronto, the nation's largest market, just as rising interest rates and record levels of household debt have put the squeeze on borrowers.
With homeowners' equity falling in tandem with a 15 per cent drop in the average Toronto house price since April, and lenders tightening credit in response to tougher regulation, the ability of people to borrow against the value of their home is shrinking.
Toronto debt adviser Scott Terrio said Canada's perennially low mortgage delinquency rate, which stood at just 0.34 per cent in the fourth quarter of 2016, masks the extent of the problem.
Mr Terrio, president at DebtSavvy.ca, said a 40 per cent surge in home equity lines of credit since 2011 has helped mask a credit crisis created by consumers who tap their home equity to pay their bills.
"The insolvency business is cyclical, and the last five-year peak was in 2009," said Mr Terrio. "We're now into the eighth year of a 5-year cycle because of people's equity in their homes and low interest rates." Outstanding home equity line of credit (HELOC) balances reached a record C$211 billion (S$222.41 billion) in 2016, according to the Financial Consumer Agency of Canada.
Toronto benchmark home prices, which remove the distortion caused by expensive houses, are down about 8 per cent since their April peak, according to the Canadian Real Estate Association's House Price Index.
While the long housing boom is finally cooling, interest rates are rising and mortgage credit is tightening. Lenders that once extended HELOCs no longer are.
"I think 2018 is going to be a scary year," said Douglas Hoyes, an insolvency trustee in Toronto.
Mortgage stress tests that come into effect in January are expected to further dampen housing demand, and economists are divided about how much further Canada's housing market will fall.
"I would guess we can see a 5 per cent price decline in 2018 (in Toronto)," said Marc Pinsonneault, senior economist at National Bank Financial.
Mr Pinsonneault said the relatively mild housing swoon that accompanied the oil price drop in Canada's energy heartland in Alberta in 2015 suggests there may be no mortgage defaults on the scale seen in the US housing crash.
Still, Mr Terrio and Mr Hoyes both said they have seen a chill in recent months from banks and other lenders looking to cut the riskiest clients from their balance sheets before a crisis hits.
Mr Hoyes said many lenders check credit scores quarterly to see which clients are overextended - and then raise interest rates or deny a request for more HELOC money in a bid to drive the riskiest clients elsewhere.
"That's how lenders de-risk themselves ... they don't want to tip you over the edge but would kind of like to get rid of you as a client," said Mr Hoyes.
Canada's big banks say due diligence means ensuring borrowers have a solid credit history and at least 20 percent equity in their property to qualify for a HELOC.
"Banks in Canada closely monitor levels of household debt and only lend to those who they believe can pay the money back," said Dave Bauer, a spokesman for the Canadian Bankers Association.