Is a Canada housing crisis looming?

While mortgage delinquency rates across Canada are on the up, they’re still low by historical standards. But the national housing agency is expecting the number of mortgages in arrears to continue climbing – especially in Toronto and Vancouver, the country’s two priciest markets.

Mathieu Laberge (pictured), senior vice president of housing economics and insights at Canada Mortgage and Housing Corporation (CMHC) told Canadian Mortgage Professional that Vancouver was likely to see arrears double in the next six to 12 months, having already experienced a twofold spike from the lows of 2022 and 2023.

A further uptick in Toronto, meanwhile, could result in delinquencies in both cities jumping to the levels seen between 2010 and 2015. That’d be unlikely to trigger a mortgage market meltdown – but Laberge highlighted in a recent analysis that it’s a trend worth watching.

“The magnitude of changes in Toronto and Vancouver has been significant over recent months and will keep being significant over the next year or so,” he told CMP. “We see this coming, and we should keep an eye on it.”

Keeping a home is typically Canadians’ top priority when financial hardship strikes, meaning they’re willing to delay payments on other types of credit such as car loans and credit cards. That typically happens about a year and a half before mortgage arrears develop, Laberge said.

But if mortgage arrears worsen to the point that a borrower has to sell their home, a tepid housing market, like the one seen over the past 18 months, can also worsen their financial woes. “If it’s a fluid, well-supplied and well-supplying buyers’ and sellers’ market, then they may have an exit strategy,” Laberge said. “There will be a buyer in the market to buy their unit.

“It’s unfortunate you have to sell your home – but at least you can pay back your mortgage and rectify your financial situation. But what we’ve observed Canada-wide is a loosening of housing market conditions in the sense that there’s significantly more sellers than buyers, which means that the exit strategy you thought you may have, other people thought so too.”

With many major cities seeing buyers’ markets prevail thanks to plunging demand and rising interest rates, homes are often remaining unsold for much longer than during the busier days of the COVID-19 pandemic. “That’s where the arrears get prolonged because people don’t have the option to sell,” Laberge said.  

Drew Donaldson, mortgage broker at Donaldson Capital, highlights that while regulatory changes may improve affordability, interest rates will be the key factor in shaping Canada's housing market in 2025.https://t.co/QAuM9b6Cji#mortgagetrends #economicoutlook

— Canadian Mortgage Professional Magazine (@CMPmagazine) November 15, 2024

The Trump factor: How could events in the US impact the Canadian economy?

Among the triggers for financial hardships that initiate non-mortgage credit and mortgage arrears is unemployment – and while the national jobless rate declined in September for the first time since the beginning of the year, it’s expected to tick even higher in the months ahead, with Toronto and Vancouver again leading the charge.

Another is Canada’s overall economic outlook, something Laberge said CMHC is watching with a “very, very close eye.” The future of the economy remains shrouded in uncertainty, especially with a curveball set to arrive on January 20, 2025, as Donald Trump steps back into the US presidency.

“There’s no strong consensus about how the economy will evolve because there’s too high uncertainty,” Laberge said. “We’ll have pretty serious signs very early next year when the new US administration comes in and starts being active about what’s in the cards for the Canadian economy.

“But that’s something that could increase volatility for Canada and the housing market, and that will be a matter of what the specifics are of what’s been announced south of the border for the Canadian economy. I don’t think it’s a secret for anyone that there’s been talk about tariffs. The devil is in the detail – what industries, what level, when? And this is the unknown we’re in right now.”

Could rate cuts help stave off mortgage delinquencies?

The Bank of Canada started slashing rates during the summer and has lowered its benchmark rate by a total of 375 basis points since June, easing mortgage costs for scores of borrowers and brightening the renewal picture for those whose term expires in the coming years.

But Laberge noted that it takes 18 to 24 months before the market feels the full impact of rate cuts, keeping some hopeful buyers on the sidelines while they wait to determine whether falling rates are a durable trend. “So this is something that may help, but it won’t help immediately,” he said.

“There has been some reaction, but there hasn’t yet been that influx of new buyers that are going to go to market with the intent of buying houses.”

That means even though rates have tumbled in 2024 and are expected to continue sliding throughout much of 2025, there’s no short-term relief in sight on the mortgage delinquency front – particularly with a slew of renewals on the way in the years ahead.

The positive news is that Canadian households have shown “extreme resilience” over the last two and a half years, Laberge said, with no reason to think that would change immediately.

“But with the volatility in the economy and this relatively slower economic growth of 1.1%, 1.2% over the last two years and the level of indebtedness, I think it will still be a good 24 months before we can say we’re over the hump of the renewal cycle where people would renew at higher rates,” he said.

“Resilience has [emerged] over that period of time and we’re feeling more and more optimistic going forward. [But] we’re still very much in the period where we need to keep a close eye on the housing market and see how things evolve.”

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