Homeownership has been a big creator of wealth for Canadians, but with property prices on the decline nationally, household equity in real estate is eroding.
BMO points this fact out in a recent client note stating that over the past year, Canadian households’ equity in real estate has fallen by nearly a whole percentage point from a year ago.
In the note, which was written in response to Statistics Canada’s national balance sheet for 2018’s fourth quarter, Robert Kavcic, a senior economist at BMO, says such a drop rivals “the steepest declines seen over the past 25 years.”
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During the early-’90s and 2009, sharp declines in equity were the result of home prices falling during a recession. Kavcic notes that even when values collapse, a borrower’s mortgage debt remains consistent, chipping away at their equity.
The recent drop, then, shares something in common with some previous equity busts, but there are key differences this time around as well — government intervention in the housing market, for one.
“The latest decline comes on the back of lower home prices again, but this time triggered by a mix of factors,” says BMO Senior Economist Robert Kavcic in a note.
These factors include the weakened oil patch, BC and Ontario policies to curb foreign investment, and tougher mortgage rules.
Overall, national wealth, which is a measure of the combined value of non-financial assets, including property, dropped by 2.2 percent to $11.1 trillion in the fourth quarter.
“The value of natural resources was affected by weaker crude oil prices in the fourth quarter, which have more recently rebounded in the first two months of 2019,” reads the Statistics Canada release.
“A [$72.5 billion] decline in the value of residential real estate… also contributed to the fourth quarter decrease, as housing prices continued to edge down,” the release continues.