Toronto, Vancouver at risk of sharp rise in mortgage arrears

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Canadians have shown “remarkable housing resilience” during the rapid rise in interest rates, but significant risks lie ahead, warns the nation’s housing agency.

The analysis by the Canadian Mortgage and Housing Corporation indicates that while homeowners continue to show lower credit arrears than renters and mortgage arrears remain at historic lows, they have started to increase. 

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The CMHC says further increases over the next six to 12 months are likely, with the most significant in Toronto and Vancouver.

One important signal of arrears risk is the sales-to-new-listings ratio. Homeowners struggling to make mortgage payments will find it harder to sell in a buyers’ market and an increase in arrears usually comes six to 12 months after a decline in this ratio, said the study. 

A rise in non-mortgage credit arrears is another indicator. When financial problems begin, homeowners tend to pay their mortgage first at the expense of other debts. 

“However, within 6 to 12 months, early signs of trouble in non-mortgage debt are generally related to increased mortgage arrears,” wrote Mathieu Laberge, CMHC’s senior vice-president, housing economics and insights. 

The study divides nine Canadian cities  into three groups: those that may not experience sharp increases in mortgage arrears, those that may see significant increases and a mixed group that warrants further monitoring.

The housing markets in Calgary, Saskatoon and Halifax fall into the first group and mortgage arrears in these cities are expected to remain close to the low levels seen after the pandemic. 

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Winnipeg falls in the third group. Though mortgage arrears appear stable for now, a sharp decline in average credit scores and an increase in non-mortgage debt arrears could be signs of trouble ahead, the study said.

Montreal, Ottawa and Edmonton are also showing mixed results and warrant further monitoring, said CMHC. 

“While their projected mortgage arrears rates are expected to remain within their post-COVID range, we anticipate sharp increases in non-mortgage credit product delinquencies for all 3 cities,” said Laberge.

Toronto and Vancouver, however, fall well within the danger zone. The high number of listings compared with sales in Canada’s two most expensive markets limits opportunities for distressed homeowners to sell. In September, Toronto had the lowest sales-to-new listings ratio among the country’s major cities, according to online realtor Zoocasa.

“This, combined with increasing non-mortgage arrears, creates conditions likely to result in increasing mortgage arrears in the future,” said the report.

CMHC’s modelling suggests that mortgage arrears in Toronto could reach highs not seen since 2012, and Vancouver, though not as bad, could reach highs not seen since 2015. 

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This could be avoided if mortgage rates fall more than expected or if the cities revert back to sellers’ markets, said Laberge. 

Though Canadians have had some relief since the Bank of Canada began cutting its rate, at least 1.05 million borrowers face a mortgage renewal at significantly higher interest in 2025, CMHC said.

At the same time, unemployment nationally is rising, which will put more pressure on households.

“This combined with the increase in non-mortgage arrears across many centres and buyers’ market conditions in Toronto and Vancouver reinforces our view that we need to keep a close eye on mortgage arrears over the next 6 to 12 months,” said Laberge. 

Homeowners have options. The CMHC can help insured borrowers work with lenders on solutions to ease the burden of payments such as short-term mortgage deferrals, extending the amortization period and adding missed payments to the mortgage balance.

The new Canadian Mortgage Charter lays out federal guidelines on how the financial industry can give individual support to borrowers who are going through financial stress.

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 “Complacency is not an option,” said Laberge. 

“Even if Canadians continue to draw on their remarkable housing resilience, significant risks still lie ahead in this uncertain economic environment.”

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How do you know if you’re in a bubble?

You could take a look at the Saylor-Buffett Ratio. Developed by Acadian Asset Management portfolio manager Owen Lamont, the index tracks the relative performance of just two stocks: Warren Buffett’s Berkshire Hathaway Inc, “which owns boring old companies” and Michael Saylor’s MicroStrategy, “a bitcoin evangelist.”

As Lamont’s chart shows the ratio peaked in February 2000 during dotcom mania, fell below parity for years and then bobbed up again in the meme-stock craze of January 2021, only to fall back when that bubble burst. Note that at times of speculative excess, Buffett is said to have “lost his touch,” because his investing values become unfashionable.

As of October 2024, the ratio was at a high not seen since 2000, and that’s before the massive rally brought on by Donald Trump’s election victory.

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Bitcoin has climbed almost 30 per cent since the presidential vote, pushing MicroStrategy to a gain of almost 400 per cent this year. Berkshire Hathaway is up 32 per cent.

“The recent increase in the Saylor-Buffett ratio is one of the many small pieces of evidence … that all seem to be pointing in the same direction: the market is getting frothy,” wrote Lamont.

• Canada Post strike continues.
• About 3,500 workers with Canadian National Railway Co. hold a strike vote today.
• Today’s Data: Canada housing starts, International securities transaction, United States NAHB housing index, net capital inflows

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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