Up to 6% of Canadian home owners said they missed a mortgage payment recently as a consequence of the COVID-19 pandemic, according to a mid-April poll by Forum Research.
The survey also found that 76% will fail to pay another loan instalment before the crisis ends. Meanwhile, 46% were unable to secure mortgage deferrals and other similar forms of aid from their lenders, CMT reported.
Renters were hit especially hard, with 14% saying that they missed a payment recently.
Mobility restrictions and work stoppages since late March have severely affected householdsand landlords alike. The global outbreak has upended the national economy as a result, said Todd Skinner, TransUnion’s regional president for Canada, Latin America, and Caribbean.
“Whether it’s their health, financial well-being or changes in day-to-day living, the lives of millions of people in Canada and abroad have been dramatically changed,” Skinner said.
Data from TransUnion indicated that 57% of Canadians saw their incomes fall over the past few weeks. Another 10% are bracing themselves for further declines in the near future, with the possible losses pegged at an average of $935.
The most acute effects were seen among millennials and Gen Z-ers, TransUnion said. Approximately 78% and 74%, respectively, of these cohorts expressed fears about not being able to fulfil their monthly bills.
Nearly 600,000 Canadians have so far taken advantage of some form of mortgage deferral assistance due to the COVID-19 crisis, according to the Canadian Bankers Association (CBC).
With the average mortgage payment amounting to $1,326, this has freed up roughly $778 million per month, according to the Canada Mortgage and Housing Corporation.
“This keeps money in the pockets of people who need it now,” the CBA noted. “Banks have publicly reported that more than 90% of those seeking a deferral are approved.”
But, of course, taking advantage of mortgage payment deferrals naturally comes at a cost. And that has been calculated at up to $12,000 in extra interest costs for those taking the full six-month deferrals, according to math from Integrated Mortgage Planners Inc. mortgage broker Dave Larock, published recently in the Globe and Mail.
Mortgage deferral costs for someone with a mortgage rate of 3% and amortized over 25 years (and assuming they just bought a house and immediately deferred payments) would amount to $2,082 in additional interest for a one-month deferral, $6,217 for six months and $12,346 for a six-month deferral, when added back into the life of the mortgage and assuming no extra repayments.
House Sales Down 14% in March
Home sales were down 14% nationally in March on the heels of the COVID-19 pandemic, according to the Canadian Real Estate Association (CREA).
The declines in sales volumes varied by region, with drops of up to 24.9% in Hamilton-Burlington, 20.8% in the Greater Toronto Area, 26.3% in Calgary and 7.9% in Ottawa.
“March 2020 will be remembered around the planet for a long time,” said Jason Stephen, president of CREA. “Canadian home sales and listings were increasing heading into what was expected to be a busy spring [but] after Friday the 13th, everything went sideways.”
Average prices came in at $540,000, unchanged from February and up 12.5% from last year. Excluding the higher priced markets of the Greater Toronto and Vancouver Areas, the average price comes in at $410,000.
Looking ahead to April, CREA senior economist Shawn Cathcart said this: “Preliminary data from the first week of April suggest both sales and new listings were only about half of what would be normal for that time of year.”
Mortgage Rates Falling
After a recent rise in fixed mortgage rates, they have since started to fall back down, with a number of big lenders cutting rates between 5 and 20 bps.
Rates are declining due to falling bond yields (which lead fixed mortgages), as well as a decline in risk premium costs for borrowers, according to a recent post on RateSpy.com.
“…the trend implies we could see conventional 5-year fixed rates dip at least 20 more basis points (under 2.50%), if funding costs don’t shoot much higher,” the rate-comparison site noted. “Few would have expected that a month ago. At the time, spooked investors were forcing banks to pay far more for their funding. Since then, the Bank of Canada, Finance Department and CMHC have committed to buying hundreds of billions in money market instruments, bonds and mortgage securities, putting a lid on rates.”
HELOC Borrowing Down
Home Equity Line of Credit (HELOC) borrowing growth continued to decelerate in February, falling to a rate of 1.6% year-over-year, according to data from OSFI.
That’s down from an annual rate of more than 7% in 2018.
“Despite the overall stabilization of home prices in recent years, HELOC borrowing has been persistently slowing since the start of 2019, noted a recent Scotiabank report. “It is unclear if borrowing has been actively declining due to a change of consumer preferences or due to limited ease of accessing these funds.”
Overall mortgage growth remained strong in February, although that will certainly decline as data post-COVID-19 starts to roll in.
“Recent economic turmoil will likely lead to weaker mortgage credit growth in the months ahead,” Scotiabank noted. “In March, the Canadian labour market lost over 1 million jobs and home sales rapidly declined in the month. Mortgage credit growth is expected to stall in the coming months as the Canadian economy remains impacted by the pandemic.”
The Federal Reserve building. | J. David Ake/AP Photo
The U.S. mortgage finance system could collapse if the Federal Reserve doesn’t step in with emergency loans tooffset a coming wave of missed payments from borrowers crippled by the coronavirus pandemic.
Congress did not include relief for the mortgage industry in its $2 trillion rescue package — even as lawmakers required mortgage companies to allow homeowners up to a year’s delay in making payments on federally backed loans.
When individuals stop making payments on their home mortgages,the companies that handle the loans and process those payments, so-called mortgage servicers, are still on the hook: They’re legally obligated to keep sending money to insurers and investors in mortgage-backed securities, the giant bundles of home loans that are packaged and sold on the securities markets.
Now industry executives and regulators are worried that Congress’s generosity toward homeowners could wipe out those companies, causing investors not to get paid and potentially bankrupting the entire mortgage finance system — a domino effect that would make it much harder for borrowers to access credit to buy homes.
Housing lobbyists sounded the alarm to Senate staff about the potential danger, but the sheer scale of the rescue bill and the focus on communicating the industry’s other big concerns — such as the details of how long mortgages would be suspended — meant their warnings were unheeded in the rush to finish the massive legislation.
Yet while the final bill allocates $454 billion for the Treasury Department to support the Federal Reserve’s emergency lending programs, including for large corporations, there is no overt requirement for lending to mortgage companies, despite a weeklong lobbying push by the industry.
“There was a strong desire on the part of housing lobbyists to have the bill explicitly direct the Fed and Treasury to use some of that money to finance servicing advances,” said Michael Bright, CEO of the Structured Finance Association, which represents 370 financial institutions in the bond market.
Now industry lobbyists are turning their efforts to Trump administration officials.
“We have been in constant contact with many parts of the administration to ensure that they understand the urgency of this liquidity facility being set up,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association, a trade group.
Concerns about liquidity in the mortgage finance system have been building for years, as the companies that service mortgage loans are increasingly nonbanks — which don’t have banks’ access to Fed loans or their strict capital requirements and deposits to fall back on. Banks, which once dominated the business, have steadily pulled back since the 2008 housing market meltdown.
Usually, a mortgage company can withstand a few borrowers failing to make payments, but the breadth of the coronavirus pandemic has sparked industry estimates of between 25 and 50 percent of borrowers being unable to pay.
State regulators wanted to weigh in because “our members are the primary regulators of the nonbank servicers,” said Margaret Liu, CSBS senior vice president and deputy general counsel.
If 25 percent of borrowers fail to make their mortgage payments, the industry would need $40 billion to cover three months of payments, according to Jay Bray, CEO of the servicing company Mr. Cooper. Depending on how long the situation lasts, Broeksmit said demands on servicers “could exceed $75 billion and could climb well above $100 billion.”
And if mortgage companies fail across the board, “the system breaks down,” said Andrew Jakabovics, vice president for policy development at Enterprise Community Partners, an affordable housing nonprofit.
“The kinds of relief we did during the foreclosure crisis — all of that had to do with the fact that we wanted to ensure that investors from across the world would continue to treat U.S. mortgage-backed securities as an incredibly safe investment,” Jakabovics said. “That would have very serious ramifications for the availability and price of mortgage credit.”
Bright, who formerly managed the $2 trillion portfolio of government-run mortgage financier Ginnie Mae, said he believes the Fed will come through with an emergency lending program for the industry.
“Even though that language wasn’t included [in the Senate bill], I do think it’s likely that this could be part of [the Fed’s Term Asset-Backed Loan Facility Program] in the end,” he said.
Federal Housing Finance Agency Director Mark Calabria — who regulates Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants that prop up about half of the nation’s $11 trillion market — said this week in a Bloomberg TV interviewthat he was confident that large banks would continue to extend credit to mortgage servicers for the time being.
Still, he said, “if we get to a situation where this goes longer than two months, absolutely there’s going to need to be a bigger solution.”
Broeksmit said some mortgage companies won’t make it that long, depending on the share of loans in their portfolios located in areas of the country where the virus has hit particularly hard.
“Some servicers will need the liquidity sooner than others, so we’re hoping that the facility will be set up immediately,” Broeksmit said.
Liu also said the credit lines from banks wouldn’t be enough to keep the system afloat.
“The mortgage market is one of the many multiple complexly interconnected pieces of our financial system, so those assurances are really important, but I think the role of the government in being a reliable and available source of credit for the mortgage market and mortgage servicers during a crisis is even more important,” she said.
In the meantime, the industry is crossing its fingers that the individual cash relief in the Senate bill will lead to fewer people needing to request forbearance on their payments.
“We’re hoping that the take-up rate won’t be too high and that the duration is not extended, but we have to prepare for both,” Broeksmit said.
Canadians couldn’t get answers on mortgage deferrals at Canada’s biggest bank because information and eligibility requirements kept changing almost by the hour, a source who works for RBC tells CBC News.
When the first details were eventually given out to frontline employees at RBC’s Mississauga call centre, they revealed deferrals would be available to all mortgage holders, but in a way that appears to ensure the bank would not lose money in the short term and may even come out ahead.
“Deferrals actually meant that interest accrued from each deferred payment was being added back into the principal balance of the mortgage,” said the source.
“Technically clients would then be [charged] interest on top of interest for those payments [that were] deferred,” they said.
In effect, it’s as though the bank is loaning you the amount that you would have paid in interest during the deferral period and then charging you interest on that loan as well.
“They’re going to make more money because they’ve just loaned you more,” said Peter Gorham, an actuary with JDM Actuarial Expert Services.
“I don’t know that I want to say it’s profiting. I would say it’s not costing them a penny.” he said.
“People are increasing their debt load. If you are not desperate for the financial relief, don’t take it,” Gorham said, adding RBC and other banks are taking on increased risk from deferrals, a risk that could grow significantly if the COVID-19 crisis runs from months into years.
When it comes to repaying the increased debt load from a deferral, there may be other complications for mortgage holders.
“This also means an increase in clients’ payments at their next renewal period due to the increase in mortgage balance,” the source at RBC said.
If the client doesn’t want a bigger payment, they can extend the amortization period, the source added. But that typically requires a full credit application which may affect their credit score.
The other option is making extra payments after the deferral period ends to bring the mortgage back down as quickly as possible to its original amount.
Two other big banks have mortgage deferral polices similar to RBC’s.
In an updated set of deferral FAQs posted on its website, Scotiabank too says interest will continue to accrue.
“You will pay more interest over the life of your mortgage, but a deferral will also help you with your short-term cash flow,” the banks states on its website. Scotiabank is also offering deferrals on personal and auto loans, lines of credit, and credit cards.
On its website, BMO also states interest will continue to accrue on mortgages.
The Canadian Bankers Association issued a statement late Sunday night saying, “Customers should understand that [a deferral] is not mortgage forgiveness. Mortgage deferral means that payments are skipped for a defined period of time, during which interest which would otherwise be part of the deferred payments is added to the outstanding balance of the mortgage.”
Credit card deferrals
RBC is also offering six-month deferrals on credit card payments, according to an email obtained by CBC News. But once that period ends the minimum payment would include all accrued interest from the deferred payments. Meaning the minimum payment could jump significantly.
Most minimum payments on credit cards are interest plus $10. But Quebec passed a law in 2017 changing minimum payment requirements in an effort to counter rising household debt by making people pay off more than just accumulated interest.
Minimum payment on credit cards in Quebec is 2.5 per cent of the balance owing and will eventually rise to five per cent.
Last week, all of Canada’s big banks agreed to a request from Federal Finance Minister Bill Morneau to defer mortgage payments for up to six months for people suffering financially due to COVID-19.
The banks issued a joint statement saying they “have made a commitment to work with personal and small business banking customers on a case-by-case basis to provide flexible solutions to help them manage through challenges such as pay disruption due to COVID-19; child-care disruption due to school closures; or those facing illness from COVID-19.”
But initially many Canadians looking for deferrals said, after waiting for hours on hold, they were told they didn’t qualify. One BMO customer — who is actually a former BMO branch manager — said he was told he needed a full credit check and credit application and even then the bank would not tell him their criteria for approval.
It turns out the person he spoke with may not have known the criteria themselves at that point.
By midday Wednesday, workers at RBC’s Mississauga call centre still hadn’t been informed.
WATCH | Consumer frustrated at lack of information about mortgage deferrals
Confusion surrounds COVID-19 mortgage deferrals
Many Canadians looking for relief from mortgage payments during the COVID-19 pandemic are met with a confusing process. 2:00
“Anyone calling in to RBC between 8 a.m. and noon was directed to call back ‘later’ as we had been given no direction or timeframe as to when relief procedures would be implemented, other than ‘soon,'” a source told CBC News.
On March 13, the finance minister said that he had already spoken with the CEOs of the big banks. The banks issued their statement promising to work with Canadians on a case by case basis on the evening of March 17, around 7 p.m. ET.
Canadians began calling their banks the morning of March 18.
But, as late as March 20, Canadians were still being told no information was available.
“I was on hold for 11 hours [March 19] and then five hours [March 20],” said Lindsay Gillespie, who has a mortgage and a line of credit with FirstLine Mortgages, a division of CIBC.
“I finally got through and was told there’s nothing that can be done right now, they don’t have anything set up. I was told to call back another time,” she said.
Also as late as March 20, some RBC customers were still being told they didn’t qualify for a six-month deferral.
“We called RBC and were told that deferrals are being assessed on a case-by-case basis and that our eligibility for a deferral is limited to six weeks,” said Jeff Hecker, a principal at a Toronto Marketing research firm.
“No explanation was provided,” he said.
In a statement issued Sunday evening, RBC said “the developments around COVID-19 are moving quickly and we understand that clients have questions. Our frontline employees are doing incredible work to respond to clients quickly and effectively, and we are staying close to them to ensure they have the information they need to support clients.”
Some in the mortgage industry say the confusion over deferrals is understandable, given the unprecedented and rapidly changing nature of the COVID-19 crisis.
“You’re going to get hiccups in this process; it’s never happened before,” said Robert McLister, mortgage expert and founder of RateSpy.com.
“It’s case-by-case, it’s completely at the lender’s discretion as far as I understand it. Even though the big banks have agreed with the federal government to offer these programs, there’s no mandatory federal guidelines that I’m aware of,” he said.
McLister says it’s possible some people are being declined mortgage deferrals because they can’t prove their income has dropped.
“But generally speaking if you are in legitimate need and you’re about to default on a mortgage payment the lender is going to work with you,” he said.
Some Canadians looking to defer mortgage payments due to COVID-19 say they are facing delays, confusion and outright denials from the country’s big banks.
“My wife called the 1-800 number for Bank of Montreal, talked to an adviser on the line to see what we are eligible for,” said Evan McFatridge of Dartmouth, N.S., whose family is down to a single income because his wife has been laid off from her job at a restaurant.
“She was told that our mortgage was too new to qualify for a deferral,” he said.
As part of the government’s pledge to help Canadians suffering financially due to COVID-19, Finance Minister Bill Morneau asked the heads of Canada’s big banks to allow people to defer mortgage payments for up to six months.
The banks responded by issuing a statement saying they “have made a commitment to work with personal and small business banking customers on a case-by-case basis to provide flexible solutions to help them manage through challenges such as pay disruption due to COVID-19; child-care disruption due to school closures; or those facing illness from COVID-19.”
But some Canadians looking for relief from mortgage payments say they’re encountering a confusing, opaque and seemingly arbitrary process that is only adding to the stress of illness, isolation and lost income.
“I called in yesterday, spent two hours on the phone, and they required a full credit check and credit application in order to even see if I was qualified [for a deferral] and then didn’t even give me a time frame,” said one former BMO branch manager.
CBC has agreed to keep his name confidential because of his concerns that his comments could jeopardize his current employment situation.
“So, they had to speak to both me and my wife over the phone, get all our income, our jobs, our assets, our liabilities, said they had to send it to the credit department for review and that someone would contact us,” he said.
“They had no criteria for what they’re looking for. If they said to me, ‘One of you has to be laid off. One of you has to be in isolation. You have to sign a disclosure statement.’ Fine.”
The man’s wife is on reduced hours at home because she has to care for their kids, whose schools have been shut. Facing the loss of a large chunk of their family income, he said ,he wanted to get ahead of the problem and defer two or three months of payments.
“Even if I had to pay the interest payments during that time and they deferred the principal amount so the balance stayed the same, so be it, that’s fine,” he said.
“I’ve been through things in Alberta like the Fort McMurray fires where basically [all that was required then] was a call in to defer payments.”
Questions for banks unanswered
CBC News asked each of the big five banks for more information on the criteria for the case-by-case-based decisions on mortgage and credit deferrals.
Who would qualify?
Is there an application process?
Does the entire household have to be off work?
Will they require documentation?
None of the banks answered any of those questions.
TD, CIBC and Scotiabank all responded by repeating their commitment to work with personal and small-business banking customers on a case-by-case basis. Each encouraged customers to contact their call centres directly or visit their websites.
BMO and RBC did not respond to emails from CBC News.
‘My family will run out of money’
RBC customer Elsie Mamaradlo of Edmonton said she was also denied a deferral because her mortgage was too new.
“I got so frustrated and at the same time worried,” said Mamaradlo, who lost her job when the public recreation centre she works at was shut down due to coronavirus concerns.
Mamaradlo said that without the mortgage deferral, she faces a grim future.
“My family will run out of money for food and essentials,” she said.
Mamaradlo’s mortgage is insured with the Canada Mortgage and Housing Corporation (CMHC). The government is purchasing up to $50 billion of insured mortgage pools through the CMHC, which says that stable funding for the banks and mortgage lenders is meant to ensure continued lending to Canadian consumers.
In a tweet, CMHC said it “will support lenders in allowing deferral of mortgage payments for up to six months for those impacted [by the coronavirus].”
Alyson Whittle of Cochrane, Alta., said her bank, B2B, which is a subsidiary of Laurentian Bank, told her she could defer her next mortgage payment but then the following payment would be double.
“I was super frustrated,” she said.
Whittle, who works in sales for a home builder, and her husband, a utilities driller, are both out of work.
“My mom came to visit us and she had just come back from Las Vegas and developed a respiratory illness,” she said.
After that visit, Whittle says both she and her husband started feeling similar symptoms. They’re now both off work in isolation but haven’t been tested yet.
Laurentian Financial Group’s assistant vice-president of communications, Hélène Soulard, said it’s possible Whittle called before they were able to inform their call centre representatives about the deferral options.
“Rest assured we are committed to helping our customers who are facing hardships if they are not able to work due to illness, job loss or other reasons related to the COVID-19 crisis,” she said.
Sales of distressed homes usually come in several forms. First, there are short sales or pre-foreclosures, deals where an owner who can no longer afford the property tries to work out a purchase with a buyer, subject to the approval of the lender. If that doesn’t work, the lender may start foreclosure proceedings, and the home may be put up for sale at a public auction. If the highest bid at the auction is insufficient, the lender then gets title to the property and holds it as a bank-owned (or REO) property.
The purpose of a foreclosure auction is to get the highest possible price for the property, in order to mitigate the losses a lender suffers when a borrower defaults on a loan. If the sale amount covers the outstanding mortgage debt and various foreclosure costs, then any surplus goes to the borrower. Bidders, on the other hand, are looking for investment bargains, so many homes sold at foreclosure auctions ultimately sell at something of a discount compared to traditional properties.
Preparing for a Foreclosure Auction
Foreclosure auctions differ substantially from a typical residential sale. There are no terms to discuss, no haggling over paint or appliances. The property is sold as is, where it is, and with any existing faults and limitations. The property may be sold on an absolute basis (the highest bid wins, even if it’s for a tiny amount) or with a reserve or minimum bid (the property has to sell for at least a given price, otherwise the lender gets title).
The condition of the property may range from wonderful to awful, and it may or may not be occupied. Some properties are “zombie foreclosures,” a situation where the borrower has abandoned the property before the foreclosure has been completed. In all cases, bidders should review disclosures with care and seek as much information as possible about the property.
It’s important to visit the property before the auction, if you can, especially if you live locally. Does it seem occupied or not? How does the exterior condition appear? Be aware that trespassing and Peeping Tom rules may limit access unless you’re invited onto the property. Some bidders drive by the property just before the auction to ensure that its condition hasn’t changed since the disclosure papers were written. In some cases, you may be able to see a virtual tour or even attend an open house.
Lastly, real estate values are related to local economies. How much would a given property be worth if it was in pristine condition? What rental could you expect? Is there a lot of local sale and rental demand—or a little? Speak with local real estate brokers to better gauge the market.
Your Foreclosure Auction Questions, Answered
As with any real estate purchase, there are a variety of expenses associated with a foreclosure auction. Charges, fees and costs vary widely, so it’s important to understand these expenses before you bid. Here are some questions people often ask about financing and buying a foreclosure at auction:
Before the Auction
Since it’s the lenders that are selling houses, why don’t they just finance the foreclosure sale? That usually doesn’t happen. The division of the lending institution that sells foreclosure properties and the division that does real estate financing are two separate organizations.
Are foreclosures riskier than existing home purchases? It depends on which foreclosure and which existing home. All real estate investing—like all stock market investing—implies some level of risk. But there are some inherent risks involved in buying a foreclosure home—like the inability to do a thorough internal inspection. People who buy these properties hope that the risk will be offset by the kind of discount prices often available on these homes.
Will I have to register to bid? You bet. As with a rental car reservation, you’ll typically have to provide a credit card number and expect the auction company to take a given amount to hold. Why? They want the money in case someone bids and wins, but doesn’t close the deal. How much will be taken out? It depends, so ask the auction company for details.
Will I have to qualify? Yes. The auction company wants to be sure that you have the funds to close the transaction. Most foreclosure auctions are all-cash transactions. The term “all-cash” generally means the ability to put down a deposit immediately after a successful bid and close within a short timeframe.
Do I always need the full amount in cash to buy a foreclosure? This depends to a great degree on the laws in your state. Most foreclosure auctions require payment in cash (or a cashier’s check) within a relatively short time after the auction. Technically, it doesn’t matter if the funds come from you or a lender. What does matter is that successful bidders have the financial ability to close the deal on time and in full. Ask auctioneers about financing and pre-approval requirements.
What’s the best way to learn about auctions before actually buying? Register for auctions and attend the bidding. Learn the mechanics of the auctioning process in your community. Get to know local auctioneers, brokers, attorneys, repair specialists and appraisers who specialize in foreclosures.
During the Auction
Is it better to go to absolute auctions or sales that require minimum bids? People debate this question, but it’s largely a matter of personal preference. With an absolute auction, one bidder will win, while with a reserve sale, it’s possible that no bid will be sufficient. However, if you attend a reserve sale and the lender takes title, then speak with the lender after the auction about an REO purchase. The overwhelming majority of foreclosure sales are conducted using a reserve, since lenders are trying to capture at least a minimum amount of money to offset their losses.
Can I bid $1 more than the next bidder and win the property? Probably not. There are typically minimum bid increments in place.
If I win, do I get title then and there? Not usually. The seller—usually a lender—must approve the bid. Typically, they have 15 days to do so. Once an answer comes through, there’s an additional period required to arrange closing, which may take several weeks.
After the Auction
After closing, do I own the property? In some jurisdictions, there may be an equity of redemption right that allows the borrower who defaulted to regain title to their property under certain conditions. Speak with a local attorney for details before bidding.
Will there be any liens that will become my responsibility after the sale? Most liens are sublimated (or wiped out) by a foreclosure sale. But there are exceptions. Real estate tends to attract liens, so it makes sense to get title insurance for the property with the insurer you prefer.
How much should I set aside for repairs? Each property is unique, so repair requirements can vary widely. Estimating repairs can be difficult because if the property is occupied, the residents may not want visitors. If it’s unoccupied, the utilities may be turned off. The best approach is to get as much information as possible before in the auction. In some cases, you may be able to find utility records that can help you better understand property issues.
What if I have owners or squatters on the property? If the residents won’t move, you may need to contact an attorney who can obtain an eviction notice and arrange for a sheriff to clear the property.
For more details and specifics, you and your broker should contact the auctioneer. Happy bidding!
Source: Auction.com // November 15, 2018 – By Peter Miller
By one measure, conditions in Canada are reminiscent of those present in the US right before a stateside housing bubble burst, yet a repeat performance to the north is unlikely.
Oxford Economics notes that the Canadian rate of debt to disposable income reached a record 167 percent last year, meaning for each dollar of disposable income households in Canada had, they owed $1.67.
In 2008 — ahead of the housing crash and financial crisis — the ratio was at 163 percent in the US.
However, there are a number of reasons that similarity isn’t likely a sign that Canadian households are stretched to the breaking point or US-style housing crash is imminent, Oxford Economics, a firm that specializes in economic forecasting and analysis, explains.
In economies with a higher share of indebted households, a few factors stand in the way of consumers defaulting on loans en masse. “In any leveraged economy, the key factors preventing defaults and rapid deleveraging include solid income growth, low interest rates, free-flowing and high-quality credit, and solid balance sheets,” writes Tony Stillo, Oxford Economics’ director of Canada Economics, in a Research Briefing.
“In that regard, there are some positive trends in Canada’s household finances,” Stillo continues, before homing in on three positive factors in a general climate of rising interest rates.
Canadian household income growth expected to continue
It’s not difficult to see why declining or stagnating incomes would be an issue for households dealing with rising debt levels.
Fortunately for Canadian households, Oxford Economics projects personal disposable income in Canada will increase by 12 percent from 2018 to 2020. “This will help households manage payment increases with higher [interest] rates,” Stillo says.
Debt quality in Canada is not a major concern
Citing Bank of Canada numbers, Stillo suggests big banks are approving fewer mortgages for borrowers with high levels of debt. Another possible positive is mortgage stress testing introduced a year ago.
The tests have now been expanded to force uninsured-mortgage applicants to approve for their loan at a higher rate than they are signing on for. This should be better prepared to handle higher borrowing costs in the future.
Mortgage arrears are still low in Canada
The share of mortgages in arrears (that’s at least three months of missed payments) in Canada sits at 0.24 percent, notes Oxford Economics. And in Ontario and BC, home to the country’s priciest markets, the rates are much lower. According to the Canadian Bankers association, 0.09 percent of Ontario-originated mortgages were arrears, while the rate was 0.14 in BC.