Canada’s mortgage apocalypse isn’t going to be fun, but it could have been a lot worse. The Bank of Canada (BoC) released its model on mortgages in arrears this week. Through a combination of monetary policy and bank generosity, mortgages in arrears are still expected to rise to record highs. However, without the policies implemented, the central bank forecasts that defaults would have been faster, and there would be twice as many. Mortgage apocalypse light, if you will.
A Primer On Mortgages In Arrears
We’ve explained this in more detail before, but let’s quickly run over arrear rates for new readers. Most people think of a rising arrears rate as an increase in the number of people that can’t pay their bills. In reality, it’s a sign people are unable to dispose of their property fast enough. If people can’t pay their mortgage during a real estate boom, they list their home for sale. Someone buys it in a few days, and the person that almost got crushed by debt feels like a genius. Liquidity was there, so the person didn’t fall into arrears.
In a market with deteriorated macros like rising unemployment, it takes longer to do large transactions. Longer to sell, longer to secure financing, longer to close, etc… No one in the chain is in a rush to get a large transaction done. When someone falls behind on payments in this environment, they may be unable to dispose of their asset fast enough. You know, unless they’re given a few months extra to sell. Knowing this, the wide scale mortgage deferrals will make more sense.
Canadian Real Estate Expected To See A Huge Rise of Mortgages In Arrears
The Canadian mortgage arrears apocalypse was supposed to be really, really bad. The BoC expected the mortgage arrears rate to rise 48% in Q1, when compared to previous quarter. By Q4 2020, the arrears rate was forecasted to be 2.11% – over 8x the end of last year. From there, it would start falling lower, settling at 0.5% by Q4 2022. Still twice as high as the end of last year, but a lot lower than the peak. Through a combination of central bank and government policies, it’s still going to be bad – just not this bad.
Canadian Mortgages In Arrears Forecast
The rate of mortgages in arrears forecasted by the Bank of Canada, and the impact recently implemented policy measures are expected to have.
Source: BoC, Better Dwelling.
If you’re an analyst, the first data point probably stood out. It takes 90 days to fall into arrears, so why is there a rise in Q1? This lines up with other indicators that show the Canadian economy was slipping at the end of last year. Per capita GDP growth was slowing, and insolvencies were rising. In fact, Toronto and Vancouver were even seeing the rate of mortgages in arrears rising. The wide rollout of mortgage payment deferrals didn’t just delay those impacted by the pandemic. It helped those impacted before the pandemic as well.
Flattening The Curve: Monetary Style
Canadian mortgages in arrears will rise a lot, but monetary and banking tools help to lower the pain. The BoC’s model shows only minor upticks in mortgage arrears until Q4, when it jumps 33.33% from the previous quarter. It eventually peaks at 0.79% in Q3 2021, at about 3x where it is today. Before falling and settling into a rate of 0.39% by Q4 2022. That’s still more than 50% higher than the end of last year, but better than the 8x increase if uncontrolled. It’s likely still the largest arrears event in Canadian history. It just isn’t as big as it could have been without generous policy.
The measures don’t mean the government has removed the pressure to sell homes. In fact, it acknowledges there’s a lot of pressure sellers are feeling. By granting so many 6 month deferrals with such ease, households can engage in a more orderly sell off. Of course, this depends on how realistic people are about their ability to make payments at the end of deferral. If you wait until 4 months in, and realize you can’t pay – you don’t have a lot of time to dispose of anything.
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These monetary moves and bank deferrals were likely before the pandemic. It’s just a nice and convenient excuse to blame everything on it.
Spot on Trader Jim, the Canadian economic health and credit ratings were standing at the edge of a cliff before the Virus. Everyone knew it, experts were calling it and Canada was rated at the top of the worlds housing bubbles.
Those who made profits on the way up should take their losses on the way down. The Bank Of Canada and the Minister of finance policies are further dividing socio economic classes between those who own real estate and those who don’t.
Where do AirBNB owners fit in? They would have needed a helluva cushion to save them from this.
AirBNB is such a genius platform. Hosts took all of the risk, and get all of the bankruptcies, while AirBNB still banks billions and just needs to scale down platform staff.
Beautiful slice of capitalism.
Open Table is estimating a quarter of restaurants won’t reopen.
What’s the pitch now? “This neighbourhood is priced at a premium because it’s close to your office. Oh, you work from home? Well there’s great restaurants! Oh, almost all of them closed. Well, at least it’s small and expensive, right?”
The house of cards the borrowers were building facilitated by the Federal Gov, CMHC, bankers and BoC providing the liquidity by their money printing machines. It was just a matter of time, before party would and and now the dominoes have started to fall. Just needed a small push. Turns out COVID-19 was the catalyst. They have the excuse oh it was due to the virus.
There is no easy V, or U or W shaped recovery, the only way out is an L shaped recovery. Japan was 10 years ahead of the West from our first bust in 2000. They kicked the can down the road and it lasted till 2007, and now the final collaspe in 2020. The Central bankers have run out out bullets to stimulate the economy. They are at zero rates now, and the only is up for interest rates to rise in order to restart the economy again.
Digital currencies from central banks are coming to steal from savers, pensioners and wirkets to pay for banker bailouts and bonuses.
I think the main issue with most of these reports is that the government has continuously expanded all of the Covid programs such as wage subsidy, etc…. and that just means they’ll continue to expand the mortgage deferral programs for another 6, 12, etc months and however long it takes to get the economy rolling again. This would drastically lower any type of panic selling that would occur as it allows the employment situation to start healing. I’m not sure why this is never mentioned?
Let the speculators get wiped out, who cares they deserve it. I hope anyone with more than 2 houses get wiped out this year.
Come on! You wish that for your fellow Canadians.
Not all of us have a pension, so we will have rental properties.
If you took the risk, you get to keep the rewards,
But why should the rest of society have to pay if you made a loss in RE?
I agree 100%. This is why we should be protesting the “rescue packages” being put forth, Especially if they eventually propose to forgive deferrals in the end (anythings possible with the Lemon socialists running the show).
Sadly, those who patiently waited for a pullback, not jumping head first in unrealistic Principle Price tags, are now going to help the greater fools with bailouts. This is a very dangerous situation for those not owning real estate.
The Bank of Canada and Minister of Finance better be careful with what they sweep under the rug. Mortgage Fraud, Speculation and Money laundering cover ups are not a good look for Canadians who have been financially prudent.
A valid point not everyone has a pension and savers interest rates are at zero or negative for over a decade.
There is a reason why interest rates have continued to be at zero for nearly a decade and this is the first time this has occurred in 5000 yrs.
During the last election the voters did not demand that the interest rates must be normalized in order to get their vote. Instead they cheered for lower rates and free handouts.
As for people having to resort to buying properties to fund their pensions is concerned. There is nothing wrong about owning rental properties. However, if anyone bought these properties on the belief that houses always go up and they don’t have 6 months of savings to pay their mortgages then why should the tax payers have to bail them out? It is a moral and a political hazard.
In real terms, interest rates are already negative once you factor in the fake, understated inflation numbers the govt puts out claiming there is no inflation.
This event as the cost of living and purchasing power of a workers earnings plummet.
You are right. When we look at housing as a speculation, for investment, why should losses be treated differently than someone who just lost money on their Equity portfolio? Why do those in real estate, which has been a very good investment for three decades, get financial aid packages from taxpayers?
You’d have to be out of your mind to buy real estate in the forseeable future.
Real estate loans have always been a non-risk free unlimited liability. Wealthy people do NOT have mortgages.
Thye don’t teach you that in school. Your teachers probably had mortgages.
Banks created hundreds of billions of sub prime mortgages on the way up for profit. Taxpayers are supposed to pay for the default if those mortgages on the way down?
Why did CMHC insure all those junk mortgages with taxpayer as the guarantor? Hundreds of billions of sub prime mortgages insured without any bidding process from private insurers to determine the real risk to taxpayers is criminal negligence. Evan Siddall, head of CMHC sure picked a nice time to retire leaving taxpayers with the liabilities as things crumble.
Bank of Canada bought 150 billion of those dodgymortgages with taxpayer money from banks at 100 cents on the dollar as soon as the Covid lock downs occured. Nothing but a massive giveaway of taxpayer money for risky junk.
Now taxpayers will eat huge losses as these mortgages default.
Crony Capitalism 101.
That’s not completely correct. Cmhc charges 4% for 5% down mortgages. So basically for every 25 mortgages insured, 1 house is paid for. So even if 1 in 25 people default there should be no cost to tax payers. That’s why cmhc has been increasing there fee, to cover a economic disaster like this.
How is 4% covering the enormous risk associated with a sub-prime mortgage defaulting? Would you be sending out your life savings at 4% to some high risk borrower who only could put down 5%?
The more obvious question is – if these sub-prime mortgages (that banks have profited from creating) are so safe, why aren’t banks insuring it themselves?Why do banks insist taxpayers be the ones to insure this junk (via CMHC).
And why is govt & banks eager to keep out private insurers who would undoubtedly set the mortgage default risk premium way higher (i.e price discovery) thus exposing the scam of underpricing risk to profit banks at taxpayers expense?
Even a blind man can see this is privatization of profits and socialization of risk/debt – the definition of crony capitalism.
Really good article that points to something obvious – the 6-month mortgage deferral allows people to get their act together and sell before the wolves are at the door. No foreclosure, no arrears.
Something like 700,000 households are now deferring mortgages. There are currently about 160,000 listings in Canada, per Realtor.ca (just do search on “Canada”). I don’t know how many of those 700,000 need to sell, let’s say 10% of them do, that would increase listings by nearly 50% by September. Then there are the listings that would occur anyway (estates, career moves, etc).
Pent-up supply, not pent-up demand.
Where’s the pent up money ?
Where’s the FOMO ?
Where’s the foreseeable upside ?
It’s time for the Big Banks in Canada to take a hit on their pristine financial reports, cutting their dividedns is a very small starting point.
The Mortgage Stress test was one good policy that helped removed questionable loans onto private lenders. I’m afraid though, backdoor channels / transactions may have taken place, ultimately rendering the stress test ineffective in protecting tax payers.
Zalzon makes a valid point. What is unfolding is nothing other than Crony Capitalism 101. And yes they don’t teach finance in school.
A good number of unelected public servants who are chief’s such as BoC head Mr Poloz and his counterpart Mr Siddall at CMHC have all been waiting to retire from their posts with their lofty guaranteed defined pensions and all they have been doing is they kept kicking the can down the road.
They kept piling on the debt and the FOMO crowd cheered and now they are all crying out for bailouts.
This why the quality of life of the hardworking lower and middle class white/bluecollar workers has been deteriorating ever since 2000 economic collaspe.
There is no money for new roads, bridges, schools, hospitals because it is being funnelled to the bankers and bond holders who buy the government debt that the BoC has been monitizing the doggy loans that they buy off the books of the chartered banksters to pay for the ongoing bailouts. So that the same banksters can keep lending more money to new borrowers and keep the liquidity for the lenders.
In this day and age there should be no place for tax payer funded lending organizations such as CMHC period. It should be disbanded.
So the banks never actually want to end up with the properties that they hold the mortgages to. They don’t want to be landlords or deal with listing on foreclosed properties, so kick the can and allow the debtor to deal with the work of getting it sold. Question is, once the 6 months is up what’s going to happen ? Another deferral or do the foreclosures begin at a rapid pace? Politically they can attack the banks and say how evil they are to do that in unprecedented times, but realistically banks asset sheets are going to start looking ugly once property values drop, then add to that the lack of income coming from all their loans. something will have to give.
I am so pleased to see that everyone on this blog post is so well informed but as always we are always out numbered by the crowd.
When the US housing market collapsed during the previous sub prime crisis. It started in 2006 but took another another 6 years to bottom out in 2012.
During that same period, CMHC and BoC with the help of the US Federal Reserve banks credit swaps of more than $100M was handed out to the bankers in the form of liquidity to continue lending for Real Estate and that created an illusion of the Canadian banking system was so resilient and well managed. Oh really!
The G20 economies have barely grown since 2009, the reason being the banks never lent any money to small busineses who create more than 70% of the jobs. Yes, the big companies only layoff people.
Instead they kept lending to subprime borrowers using the bogus CMHC umbrella which uses tax payer funded unlimited liability guarantee for a misely 5% premium which is a one time fee that most borrowers simply never pay in cash, it is rolled into the mortgage and amortized to 25yrs. Has anyone ever audited their books??
What is being set is a very bad precedence of bailing out reckless borrowers and rewarding them with extended forbearance on their debt payments at the cost of financially prudent savers who have been waiting in line for their opportunity to buy the low but when it comes to RE. It is so obvious that it rigged and they will do everything in their power to keep the housing bubble going to keep getting their votes. And make no mistake this will continue no matter which party you vote for. They are all in it together!
I forgot to add, the real inflation is equal to the how much the house prices have risen since 2000. But wages have barely kept up due to the opening of the borders and taxes have kept rising. And to make ends meet the consumers have resorted to using credit to fund the shortfall in their tax paid incomes.
There is also another twist that most folks dont realize and neither does the economist and academics.
They have been manipulating the currency by weakening it so it becomes cheaper for folks who own US/Euro etc currency.
A $1M dollar house in Canada will only cost about $720,000 if you have US dollars. So the realtors get buyers into bidding wars and little do the local buyers know that they just can’t compete and every new offer or bid will raise the selling price and the relator will get higher commissions and they will brag the house prices are going up!
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