High interest rates continue to weigh down the market, says national housing agency
Residential mortgage debt has posted its slowest annual growth in Canada for 23 years as borrowers continue to face high interest rates and affordability challenges, according to the national housing agency.
Canada Mortgage and Housing Corporation (CMHC) said in its latest residential mortgage industry report, released today, that outstanding residential mortgage debt across the country ticked up by 3.4% in February compared with the same time last year, bringing its total to $2.16 trillion.
Still, the agency warned that cooldown could be “short-lived” with the housing market expected to heat up again in the coming years and a further increase in national average home prices also in the cards.
Unsurprisingly, CMHC’s research showed that mortgage delinquency rates are on the rise amid persistent high interest rates and borrowing costs – but by historical standards they remain low, the agency said, at 0.17% in Q4 2023 (up marginally from 0.14% in Q3 2022).
CMHC has noted a shift in borrower preference toward shorter-term fixed-rate mortgages in recent times as Canadians lock into the security of fixed borrowing costs while also keeping an eye on the possibility of lower rates down the line.
That’s a trend that persisted in its latest research, with borrowers continuing to gravitate towards those options “despite lenders offering large discounts on five-year, fixed-rate mortgages,” the agency said.
“Both lenders’ and borrowers’ behaviour indicate an expectation that interest rates will fall in the coming years,” CMHC indicated.
Canada’s total residential mortgage debt stood at $2.16 trillion as of Feb 2024, up 3.4% from Feb 2023.
— CMHC (@CMHC_ca) May 29, 2024
However, we’re seeing the slowest mortgage growth in 2 decades as high #InterestRates mean less people are taking out mortgages.
Top trends. 👇 /1 pic.twitter.com/0eONOJR38A
Risk profile of alternative lenders increasing
Canada’s biggest alternative lenders have seen assets under management shrink for consecutive quarters – and their lending activity risk has increased compared with 2022, according to the report.
In fall 2023, CMHC said the country’s largest 25 mortgage investment entities (MIEs) had seen a boost as high interest rates pushed many borrowers away from the conventional space – but that trend has faded, with those organizations seeing assets under management dip by 2.1% in 2023’s fourth quarter even as overall mortgage debt in Canada posted a 3.5% increase.
Higher defaults and foreclosures in both single-family and multi-family segments were apparent for alternative lenders in Q4, while their proportion of first lien mortgages decreased – “thereby heightening their vulnerability to amplified losses in the risk of default,” CMHC said.
Nonetheless, alternative lenders also saw other risk metrics improve, with stability persisting in the average loan-to-value (LTV) ratio on new mortgages. Lending rate and investors’ yields were up, while debt-to-capital saw little change and MIEs continued to see improvements in their share prices.
Notably, CMHC’s analysis showed when borrowers have a successful exit strategy from the alternative lending space, it often depends on their ability to sell their home. In 2023, just 46% of alternative borrowers were able to switch back to a conventional lender, with 54% selling their property.
That was a marked change from just five years previously, when 68% of borrowers in the alternative space successfully returned to conventional lenders and just 32% had to sell their home.
Overall mortgage debt risk continues to rise
Amid surging interest rates in recent years, overall mortgage market risk “has likely more than doubled” – and an increase in amortization schedules from 30 to 40 years would have little impact on reducing that risk, CMHC said.
Simulations exploring that prospect, according to the agency, showed extended amortizations would result in only a slight improvement in overall risk levels.
Victor Tran of RATESDOTCA cautions that while a potential interest rate cut by the Bank of Canada this summer would provide some relief, its impact might be minimal due to high housing prices.https://t.co/5AeLuM9Llw#mortgageindustry #mortgagetrends #economicoutlook
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 24, 2024
“Relative to the recent increase in interest rates, extending the amortization schedules has little impact on the monthly payments,” it said. “With current interest rates, raising the amortization schedule from 30 to 40 years would only reduce monthly mortgage payments by only 5%.
“Raising the amortization schedules would be more effective at reducing monthly mortgage payments when interest rates are low.”
Homeowners increasingly relying on savings in fraught environment
In a research note accompanying CMHC’s report, the agency’s deputy chief economist Tania Bourassa-Ochoa said Canadians appeared to be chipping away at their savings to pay their mortgages – especially lower- to mid-income households.
While high-income Canadians recorded net savings in Q4, “on the other hand, lower-income households are dipping into their savings every month,” Bourassa-Ochoa said. “The increases in cost, mostly related to housing and other essential goods and services, have outpaced the income gains recorded for lower-income families.”
By the end of 2024, mortgage arrears will likely return to their pre-pandemic level – but “more favourable labour market conditions” next year are set to limit that increase, she added.
“As we expect interest rates to come back down, 2025 should be characterized by a boost in economic activity,” Bourassa-Ochoa wrote. “This economic momentum will help reduce potential job losses, which could otherwise have led to more mortgage arrears.”
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
