Arrears set to climb further – but is there reason to panic?
Mortgage arrears are climbing in Canada and are likely to reach pre-pandemic levels by the end of 2024 – but a more positive labour market outlook is set to weigh against that growth next year, according to the national housing agency.
Canada Mortgage and Housing Corporation (CMHC) said last week that arrears had been on the rise in recent quarters amid high borrowing costs and sizeable financial pressures as many Canadian households begin to tap into their savings to try and make ends meet.
The agency’s deputy chief economist Tania Bourassa-Ochoa (pictured top) told Canadian Mortgage Professional that while mortgage arrears remained well below historical averages – and were increasing from record lows – there were still plenty of signs that borrowers were struggling in the current climate.
During the COVID-19 pandemic, she said, “people were saving a lot more, income was strong, there were all kinds of government support programs, mortgage deferral programs, and so people were able to accumulate this financial buffer… and now we have a whole bunch of the signs that that financial buffer may be exhausted at some point.”
According to CMHC statistics, the average household savings rate remained stable at 6.2% in the third quarter of last year – but while higher-income households saved a net 12.6%, Bourassa-Ochoa said low- to mid-income households had started to dig into their savings and access debt to keep up with mounting costs.
Mortgage delinquency rates were up to 0.17% in the fourth quarter of last year compared with a low of 0.14% just over a year prior, with the agency projecting those levels across Canada to climb to 0.25% by the end of 2024. Still, a further spike beyond that level seems unlikely.
“I think there might be some factors that will limit that increase in mortgage arrears,” Bourassa-Ochoa said. “The first one is employment: [it’s] been softening a little bit this year, but we’re expecting momentum to pick back up next year.
“Unemployment is the main driver of mortgages in arrears, so if people don’t lose their jobs, they’ll try to make things work. But if people do lose their jobs, then it’s going to be a little bit harder to be able to make ends meet at the end of the month.”
CMHC reports a sluggish 3.4% annual growth in Canada's residential mortgage debt, now totaling $2.16 trillion. https://t.co/NfbVjaLE44#mortgagetrends #economy
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 30, 2024
Arrears risk seemingly under control despite borrower struggles
The unemployment rate in Canada had risen to 6.1% in April 2024 after hovering around the 5% mark for much of 2023, with that level forecast to tick slightly upwards by the end of the year.
However, CMHC said a projected dip in interest rates should spur economic activity in 2025, with the housing market – and elevated home prices – also expected to curb the level of mortgages in arrears next year.
On the home price front, “we’re still expecting them to be sustained to a certain level,” Bourassa-Ochoa said. “There’s not a lot of supply, there’s not a lot of demand – but there’s definitely more demand than supply. So that’s sustaining the house prices.
“If households are struggling, it’s obviously a big decision… everybody’s situation is different. But the housing market is still liquid, so there’s always the possibility to sell the property and to downsize or move and there will be potential buyers on the market.”
Number of borrowers moving to a new lender continues to dwindle
Another key trend from CMHC’s spring residential mortgage industry report showed that mortgage growth across Canada remained “very, very slow” thanks to the prolonged high-rate environment and elevated borrowing costs – with activity being driven in large part by renewals.
Plenty of borrowers are also choosing to refinance with the idea of consolidating debt, while the number of borrowers switching lenders thanks to high interest rates appears to have plunged.
“Back in the day, we would shop around and look for different options for maybe cheaper rates,” Bourassa-Ochoa said.
“Right now, because rates are high and because you have to pass the stress test when you renew with another lender or refinance with another lender… a lot of the borrowers are either not able to qualify or they’re concerned they wouldn’t be able to qualify, so they’re staying with that lender.”
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