Residential Mortgage Loans Continue To Spur Home Prices

Canadian banks continue to funnel money into the historic real estate boom. In the first quarter of 2017, Canadian bank loans to the real estate and construction sector hit a record at C$43.6 billion.

canadian bank loans to real estate
Canadian Bank Loans to Real Estate & Construction.

This of course is ensuring real estate prices stay elevated. As economist Steve Keen has noted, there is a direct relationship between the increase in mortgages and home prices. “The monetary demand for housing is overwhelmingly sourced from new mortgages. Divide the flow of new mortgages per year by the price level, and you have the physical flow of demand for houses per year. There is thus a relationship between the flow of new mortgages and the price level.”

To no surprise, Mortgage payments for new loans in Vancouver are up 4.5% year over year. Coincidentally prices continue to rise,  Vancouver condo prices are increasing by over 2% per month with little signs of slowing.

This dangerous concoction of rising home prices and household debt may finally be reaching a boiling point. It’s estimated household debt to disposable income could reach a mind blowing 180% by 2018 if the Bank of Canada leaves rates untouched.

This sparked a surprisingly hawkish response from the Bank of Canada governor Stephen Poloz who is finally considering hiking interest rates. Investors are now putting a 50% chance of a rate hike on July 12, which could be the first of several rate hikes in the coming months.

Expect the variable rate mortgage of 2.7% to climb in the future.