Why Canada Didn’t Fall off the Mortgage Cliff

Written by Posted On Tuesday, 02 March 2021 00:00

Canada seems to be good at avoiding disaster when it comes to real estate. Despite many predictions of a housing crash or a bursting bubble over the years, there hasn’t been a prolonged downturn since 1989.

The current surge in housing activity and rising prices is probably not sustainable, but as the economy recovers from the impact of COVID-19, low interest rates and continued demand should maintain a healthy market.

The most recent cause for concern was what would happen when thousands of homeowners who deferred their mortgage payments during the pandemic would have to start making their payments again. Some in the industry, most notably those at Canada Mortgage and Housing Corp. (CMHC), feared a “mortgage cliff” could cause many borrowers to go into default and lose their homes, and at the same time flood the market with listings.

That didn’t happen and the lack of listings across the country continues to help push up housing prices.

The Canadian Bankers Association (CBA) says its members gave mortgage deferrals or skip a payment options to 799,900 Canadians last year. More than 773,000 of those deferrals, or 97 per cent of them, expired by Jan. 31, 2021 and so far it seems the vast majority of borrowers are able to keep up with their mortgages.  

A report by Statistics Canada says that non-bank lenders provided payment deferrals on an additional 100,372 mainly uninsured mortgages during the second quarter of last year. But the Bank of Canada says 99 per cent of households with expired deferrals have now resumed payment.

In a report for Mortgage Professionals Canada (MPC), economist Will Dunning warns that “it is still early days in the unfolding consequences of the end of mortgage deferrals” and that it’s still possible we will see a spike in defaults. “That said, I have seen nothing that gives me any concern that serious problems are developing,” he says.

A survey for MPC says that 76 per cent of mortgage borrowers expect “no problem” making their mortgage payments going forward, while about a fifth say they might have “some difficulty” and less than five per cent expect more than “some difficulty”.

“For borrowers who do encounter difficulties, it should be possible to find good solutions in a very large share of cases,” says Dunning. “Due to exceptionally strong market conditions across Canada, it will usually be possible for distressed owners to make a graceful exit. With rapid price growth over the past years, many will exit with more equity than they started with. In fact, it is possible that there have been exits already by many mortgage holders who were experiencing or anticipating difficulties.”

CMHC reports that industries with the highest rates of unemployment during the early days of the pandemic – the services, construction and retail sales industries – had an above-average share of deferred mortgages. The borrowers who worked in government, education and health care had a lower-than-average share of deferred mortgages.

The four provinces that had the highest unemployment rates – Quebec, Alberta, Ontario and British Columbia – were also the provinces with the most mortgage deferrals.

“The vast majority of those who lost their jobs due to the pandemic were low-income earners – Canadians who are much more likely to be renters than property owners,” says Paul Taylor, president and CEO of MPC. “Those with well paying, salaried positions found that their employment situation was not unstable, and confidence grew as we became accustomed to

isolation and business through web cams. Many also realized their current home wasn’t large enough or well suited to both live and work in. Many who took the deferrals offered by their banks also began voluntarily resuming payments as their anxiety reduced. The outcome was the rebound in activity we all witnessed this summer and fall.” 

Statistics Canada says that in October 2020, 2.4 million Canadians who would not normally work from home were doing so. In a survey conducted by the agency at that time, more than one-quarter of respondents said they would like to move to a larger or a single-family home because of the pandemic.

That desire for more space, combined with historically low mortgage interest rates, created a red-hot housing market across the country, leading to record levels of new mortgage lending. In 2020, households added almost $108 billion in mortgage debt by November, compared to less than two-thirds that amount in 2019 and just under $46 billion in 2018, says Statistics Canada.

But the government’s Canada Economic Recovery Benefit, along with the deferral program and low interest rates, created strong growth in disposable income. 

“Disposable incomes rose 12.7 per cent on a seasonably adjusted basis in the second quarter of 2020 from the fourth quarter of 2019, with government transfers up 103.4 per cent over the same period; mortgage credit rose a more modest 3.3 per cent,” says Statistics Canada.

But it says, “If mortgage borrowing remains robust and income decreases back to pre-pandemic levels, then households may find themselves with record levels of mortgage debt relative to their current disposable income in subsequent quarters.”

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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