The Bank of Canada recently published a new report titled, ‘Home Equity Extraction and Household Spending in Canada‘. I think their social media team set them up for an easy jab on Twitter.

It is well known that housing is the business cycle, and that the growth of the Canadian economy largely hinges on household spending which of course is being financed through rising home prices. This isn’t a new concept that was created in Canada. This is a very common pattern during housing booms, and was very prevalent in the US prior to the financial crisis in 2008. Here’s a chart on US home equity cash-outs which peaked at $84B in Q2 2006.

Cash out refinances in US
Cash-out refinances in the US via Hedgeye.

However, once the drug wears off (house prices stop rising), consumer spending and economic growth drop off significantly. This appears to be developing in Canada now. The home price index has been flat for basically a year now, same with consumer spending. Year to date, retail volumes have increased just 0.8%, the slowest pace of growth since 2009.

As per the Bank of Canada report, which was actually well done, the relationship between house prices and household spending is fairly robust.

House prices and household spending
House prices and household spending. Chart via Bank of Canada

Home equity extraction in Canada ultimately peaked at $89B in 2017. Of this, $49 billion was extracted through HELOCs (Home Equity lines of Credit) and $40 billion through mortgage refinancing.

Home equity extraction not only helps fuel consumer spending but it also allows troubled households to “extend and pretend” in the event of financial difficulty. This can be seen in the surge of home equity extraction in Alberta & Saskatchewan in 2015 during the oil shock. And more recently we can see that the growth in home equity extraction has been concentrated in BC and Ontario where home prices have grown significantly over the past few years.

home equity extraction by province
home equity extraction by province.


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