Risk is low despite value contraction and recessionary pressures, says RE/MAX
While interest rate hikes destabilized most major Canadian housing markets over the past year, homeowners are expected to ride out value contraction and recessionary pressures due to lower loan-to-value ratios on new mortgages.
That is according to RE/MAX Canada’s 2023 Housing Barometer Report, which examined average price and new mortgage values in 12 major markets to compare LTV ratios between 2012 and 2022.
Over the past decade, LTV ratios were found to have declined in 67% of major markets. The largest drops were recorded in London and Moncton (21%), Halifax (15%), Hamilton (14%), Toronto (10%), and Ottawa-Gatineau (9%). Meanwhile, Calgary, Edmonton, Saskatoon, and Regina had higher LTV ratios than in 2012, but this trend is expected to change in the future as the economy picks up again in Alberta and Saskatchewan.
The cities with the highest home prices, such as Vancouver, Toronto, and Hamilton, had the lowest loan-to-value ratios at 50%, 53%, and 54% respectively. Meanwhile, Regina and Edmonton had the highest loan-to-value ratios at 88% and 83%. Across the country, the loan-to-value ratio was 57%.
“While challenges certainly exist in today’s high interest rate environment, risk factors for the overall housing market are greatly reduced when homeowners own a larger proportion of their homes,” said RE/MAX Canada president Christopher Alexander. “With half of loan-to-value ratios within the 50- and 60% range in Canadian markets, homeowners are better able to withstand downward pressure on housing values and fewer will find themselves underwater, carrying upside down loans.”
Factors behind declining LTV ratios
The RE/MAX report attributed the decline in LTV ratios to three factors: equity gains, the pandemic allowing for remote work in smaller markets, and the transfer of intergenerational wealth.
Elton Ash, RE/MAX Canada executive vice president, also pointed to the government’s willingness to implement measures aimed at reducing risk to housing markets as another contributing factor.
Ash said measures such as the “much maligned stress test” had helped maintain the overall health of the Canadian market, adding that “prudent policy” had positioned Canada’s housing market with “a reputation for stability relative to other international markets.”
These factors have made Canadian buyers much better qualified compared to a decade ago, according to the RE/MAX report.
Citing a CMHC-Equifax Canada report, RE/MAX said the number of buyers with credit scores of under 660 had been significantly reduced, falling nationally to 4.7% in 2022 from 8% in 2012. Mortgage delinquency rates had also plummeted in most markets across the country, with the national percentage dropping to just 0.14% in 2022 from over 63% 10 years ago.
Population growth to drive homebuying activity
Despite challenges related to high interest rates and recessionary pressures, a healthy number of homebuyers are expected to continue to enter the market, the RE/MAX report added.
Rapid population growth has been the primary catalyst driving home-buying activity in the past decade, with the quarterly national population estimate increasing by 12.1% between 2012 and 2022. This trend is expected to continue in the coming years as the Canadian government commits to increasing immigration levels.
“As we head into 2023, there are likely to be challenges, but a healthy number of homebuyers are expected to continue to enter the country’s housing markets from coast to coast,” said Ash.
According to Ash, the movement toward smaller markets should continue to play out in areas where in-migration from more expensive markets recently occurred, such as Atlantic Canada, Ontario and Western Canada. Major centres in Alberta and Saskatchewan are expected to see strong growth, with provincial economies operating “on all cylinders.”
Ash also noted that larger markets could see “tough times ahead” as these areas see an uptick in over-extended buyers, in addition to increased financial hardship among parents who helped their kids into homeownerships by taking out a home equity line of credit.
“While most chartered banks are typically willing to work with homeowners in distress situations, buyers that chose to work with private lenders are having a different experience, as evidenced in recent stories in the media,” he said.
Market risk is low but mitigation remains crucial
Overall, the RE/MAX report found that risk to the Canadian housing market remains low but emphasized the importance of risk mitigation given the impact of real estate on Canada’s economy.
The real estate sector has contributed 10-17% to GDP growth in recent years and government measures like the OSFI stress test are poised to reinforce this contribution in the future.
Despite the success of the stress test, which qualifies buyers at 2% above posted rates, the report noted that further measures could also create unintended barriers to homeownership and “cause more harm than good.”
“At the end of the day, what’s evident by the loan-to-value ratios and by policies to discourage speculation and over-extension is that real estate is and will always be a long-term hold,” said Alexander, who also noted that “savvy homebuyers and homeowners are looking to offset carrying costs by reducing their footprint.”
“The bottom line is that the dream and desire for homeownership is unmistakable,” he added. “The mechanisms in place to underpin stability are working, and although more challenging conditions in 2023 may cause some to temporarily take pause, the longer-term outlook remains positive. Once the Bank of Canada has signalled that it is done with quantitative tightening, the market is expected to return to more normal levels of homebuying activity overall.”
