Thursday, November 15, 2007

Mortgage Equity Take-out in Canada

From the November 2007 CAAMP Survey:

17% of mortgage holders in Canada took out equity from their homes or increased the amount of the mortgage principal within the past twelve months.

The average amount of equity take-out is estimated at $35,400.

Various findings from the survey can be combined to generate an estimate of the total amount of equity take-out by Canadian home owners:
• At present there are about 8.8 million owner-occupied dwellings in Canada.
• Next, we need an estimate of how many home owners have mortgages. According to

Statistics Canada’s most recent survey of household spending (from 2005), 53% of Canadian home owners have mortgages. Interestingly, this is a reduction from the 55% share found in the 2001 Census – while there has been very large growth in the number of home owners in recent years, which has increased demand for mortgages, it has also happened that a large number of longer-term home owners have become mortgage-free.

It is possible that the share of owners with mortgages has increased slightly since the 2005 survey, because there has been a very large volume of completions of new homes during 2006 and 2007. The consequence is that the percentage of home owners with mortgages has been roughly stable, and is assumed to be 55%. This indicates that there are about 4.8 million home owners with mortgages at present.
• 17% of home owners with mortgages have taken out equity during the past year.
• The average amount taken out was about $35,400.

Combining these factors, the total amount of equity take-out is calculated as $29 billion. To put this into perspective, personal disposable income of Canadians is about $900 billion per year. Equity take-out is equivalent to about 3% of disposable income.

This estimate of $29 billion is considerably larger than was estimated in the 2006 survey – the figure of $10.1 billion estimated in 2006 was for only equity taken out at the time of renewal. The much larger figure for 2007 includes equity taken out by people who took on new mortgages, as well as equity that was taken out at times other than the renewal dates (this can include drawing on secured lines of credit).

Out of the $29 billion in equity take-out, about 40% was taken by those who took out new mortgages, 30% was taken by those renewing mortgages, and 30% was by people who took equity through their existing mortgages or secured lines of credit. The survey data enables us to draw some conclusions about the characteristics of people who have taken out equity:
• Across the age groups, there are no significant differences in the percentages of home owners that take out equity (except that there was negligible take-out by people aged less than 25).
• The amounts taken out are highest for owners in their “middle working ages” of 35 to 54 (an average of about $38,000).
• Across the country, there are small variations in the percentage of home owners that have taken out equity. In Atlantic Canada and central Canada (including Quebec, Ontario, and Manitoba) the shares are slightly below the national average of 17%; in the west (Saskatchewan, Alberta, and British Columbia) the share is about 20%.
• Average amounts taken-out vary across the country, from $24,000 in Atlantic Canada, to $32,000 in central Canada, and $45,000 in the west.
• It might be expected that people who expect house prices to increase rapidly would be more likely to take equity from their homes, and might take out larger amounts, but the data finds only a weak relationship.

An earlier section reviewed expectations of Canadians concerning the future of house prices in their communities. Among those expecting increases (about 39% of Canadians), 19% have taken out equity in the past year, slightly above the average rate of 17%, and the average amount taken out $37,000 was slightly above the average of $35,400. Those with neutral expectations about house prices (about 49% of Canadians) took out equity at the average rate, and took out the average amount. Among those with the lowest expectations about house prices (13% of Canadians), just 12% took out equity and the average amount taken out ($28,000) was 20% below average.

Those who took out equity were asked what they used the money for. Some people gave more than one purpose. Therefore, the following responses add to more than 100%. On average, 1.2 purposes were given:
• 47% indicated that the money would be used for debt consolidation or repayment.
• 43% gave renovation or home repair as the purpose. This category was mentioned much more often by older adults (55 and over, at 53%), than by those in the middle (35 to 54, at 44%), and those under 35 (30%).
• Other responses included “other” (11%, usually to fund family expenses), to invest (6%), car purchase or repair (5%), to start up or invest in a business (5%) to purchase another property (4%), and to add a garage or granny suite (1)%.


patriotz said...

17% of mortgage holders in Canada took out equity from their homes... within the past twelve months.

Well of course they're not taking out equity from their homes.

If I took out a cash advance on my credit card, would you call that "taking out equity from my home"? It has exactly the same effect on my balance sheet as taking out a HELOC. The HELOC is secured by a lien against the house, but that's irrelevant. The house is ultimately attachable for the credit card debt too.

And of course the exposure to RE remains the same, with a decreased net worth.

What these people are really doing is borrowing against unrealized capital gains, which can go up in smoke at any time. Tomorrow's spending today.

mohican said...

You are absolutely right patriotz. There is no such thing as 'equity take out' until the house is sold. This is a marketing term to make going deeper into debt sound more appealing than it really is.

There are three things that startled me about this survey:
1) The sheer number of people who have chosen to borrow money - 17% of mortgage holders.
2) The amount that they are borrowing - $35,000 + ($45,000+ here in BC/AB)
3) What they are using the money for - mostly paying off debt (nearly half) - and secondly doing home renovations.

It is clearly a good idea to pay off high interest debt with lower interest debt but you need to stop accumulating a balance on the credit card for that to work long-term. Ultimately the debt needs to be paid off with income from a job - so get working people.

Ryan said...

This is something I ranted about recently. It seems like most of the people born after the depression just fundamentally don't understand debt, money, compound interest, or even just basic math. It seems like being so deep in debt that you can barely pay the interest is the new normal, and actually having a positive bank balance is passé.

You don't need a 40 year mortgage to be in debt for 40 years--if you increase your debt load when you renew it's effectively an eternal mortgage. If people are going further into debt when times are good, what happens when the economy slows down?

Warren said...

Hey aleks,

I agree that people are financially illiterate, but I don't think people who lived through the depression were walking financial calculators, they just had a healthy paranoia about poverty.