Canada housing crash – how likely is it?

Mortgage debt in Canada is skyrocketing. How much is too much risk for Canadian borrowers?

Canada housing crash – how likely is it?

Total residential mortgage debt in Canada mushroomed to $1.77 trillion in 2021’s third quarter as the country’s housing surge showed no sign of letting up.

The ongoing COVID-19 pandemic has acted like rocket fuel for what was already a turbocharged housing market, with low interest rates, increased savings and a yearning for more space compelling many Canadians to make their move.

With no sign that house prices across the country are ready to halt their rapid upward climb, the question remains: Could homebuyers across the country be taking on more debt than they can handle?

According to a Canada Mortgage and Housing Corporation (CMHC) senior analyst, risk is increasing in the mortgage market – but there’s still little reason for undue concern thanks to emerging positive signs in borrowing trends.

Seamus Benwell (pictured top right), who co-authored the body’s recently released Residential Mortgage Industry Dashboard alongside senior specialist, housing research Tania Bourassa-Ochoa, told Canadian Mortgage Professional that while mortgage debt was indeed continuing to rise, arrears were registering a decline at the same time.

“We see mortgage debt growth continuing to increase – it’s gone up about 11% year over year. We’re also seeing that total debt service [TDS] ratios of over 40% are increasing quite a bit in the market – especially since the second half of 2020,” he said.

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“Those two suggest that there is higher risk in the mortgage market. However, the good news story is that we see mortgage arrears for all mortgage lender types going down – so despite mortgage deferrals and other pandemic-related aid programs coming to an end, borrowers are still able to make mortgage payments or take advantage of housing market conditions to sell their property rapidly to avoid default.”

That CMHC report showed that more than a quarter of uninsured mortgages in Canada now have a TDS ratio over 40%, with the percentage of uninsured new mortgages with a TDS of 40% or less further decreasing in 2021 after posting a decline the previous year.

Benwell said that while that trend isn’t an immediate cause for worry, it could develop into a bigger problem if the number of highly leveraged mortgage customers keeps growing.

“It hasn’t reached astronomical levels, but it’s definitely increasing,” he said. “If that trend continues, I think there is cause for concern.”

With markets currently pricing in a number of interest rate increases from the Bank of Canada this year, the possible impact on Canadians’ household finances has been noted.

An Angus Reid Institute survey at the beginning of January found that “any rise in rates threatens the financial situations of Canadians sitting on debts and loans – especially mortgages,” with 53% of respondents saying an interest rate hike of 2% would negatively impact their household finances.

Benwell said that Canadians with variable rate mortgages were likely to see some negative effects from those rate hikes – although the fact remained that a large number of mortgage holders are tied to a fixed rate.

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“We know that as soon as rates start to increase, we can expect borrowers with a variable rate mortgage to be paying higher monthly payments and [that’s] absolutely something we’re going to be keeping an eye on if those higher rates do arrive,” he said.

“The other side is that most Canadians are still on a fixed rate, so that does give us a bit of a transition period where the higher rates don’t affect all mortgage borrowers.”

Much will depend on the nature of Canada’s emergence from the pandemic, with many housing market trends – the so-called “exodus” away from urban centres and increased household savings leading to higher purchasing power, for instance – brought about by the realities of COVID-19.

If a significant rise in interest rates is accompanied by an end to all government support for workers whose employment has been affected by the pandemic, that could also have stark consequences for mortgage borrowing in the coming months.

“We can certainly expect that to affect the mortgage market again. What we’ve seen today is that borrowers are able to make their payments, so that’s the good news,” Benwell said. “As interest rates rise and other supports are removed, I wouldn’t be surprised to see some borrowers end up in stress – but how many remains to be seen.”