Canada’s mortgage credit growth continued to decelerate in Q3 2018. Per a recent report from RBC, mortgage credit growth decelerated to 3.2%, the weakest pace of growth in 22 years. 

The result of banks reigning in loan growth is significant for a number of reasons. Over 90% of new money is created through banks issuing new loans, with a large portion of that growth derived through new mortgage loans. Essentially banks are shrinking the growth of new money supply, which is also called M1 and is considered the most liquid portion of the money supply because it contains currency and assets that can be quickly converted to cash. 

12 Month change of the M1 money supply. Source: Better Dwelling

As credit growth begins to contract it is effectively reducing aggregate demand, not only for housing but also has a subsequent knock-on effect, slowing new spending and wage growth. This ultimately impacts debt servicing, as wage growth is needed to offset the increasing rise of interest payments. Per RBC, Interest payments rose at their fastest rate (14.8% y/y) since 2007. 

Interest payments rising in Canada. Source: RBC

This is also important to keep in mind for rent prices. As rents are typically tied to the labour market. Rents rise when the housing boom is in full swing because credit growth is abundant, this then pushes home prices higher, which propels banks to issue more loans, creating a self fulling prophecy. The creation of this new credit drives wages higher, improving the quality of the borrowers who are witnessing strong wage growth. As unemployment falls an inflow of new migrants come looking to participate in the exciting economic prospects, many of whom become employed in the booming construction sector. These inflows push the vacancy rates even lower. 

However, like all cycles, they must eventually end, and the boom ultimately sows the seeds of its own demise. The slowdown of credit stalls wage growth, asset prices come to a standstill, and construction begins to slow. This results in job loss, and inflows of migrant workers turns to outflows. Today, we have home sales plunging, prices declining, and wage growth (a lagging indicator)  is decelerating, construction remains strong but has also begun to slow. While each cycle may differ ever so slightly, the outcome is almost always the same. I am hesitant to proclaim ‘This time is different’.