Canadian banks are exercising a little more caution when it comes to mortgage debt. Bank of Canada (BoC) data shows allowance for credit losses on mortgages jumped in Q3 2019. The rise is slowing down from the previous quarter, but is still growing much faster than mortgage credit.
Allowance for Credit Losses
Allowance for credit losses is self explanatory, but let’s go over it so we’re on the same page. This is money set aside for late or non-payment of loans, in this case – mortgages. The bank is anticipating losses here, but they haven’t yet materialized. Lenders are just getting ready, in the event these loans are not recoverable.
Allowance For Credit Losses On Mortgages Reaches $2.53 Billion
Canada’s charted banks are socking away a lot more cash for the allowance of credit losses. Banks set aside $2.53 billion in Q3 2019 for mortgages, down 0.19% from the previous quarter. Compared to last year, this is 6.97% higher than the same quarter. The quarter over quarter decline in Q3 is seasonally expected. The annual growth is substantial.
Allowances For Credit Losses – Mortgages
The aggregate allowance for credit losses at Canada’s chartered banks, in Canadian dollars per quarter.
Source: BoC, Better Dwelling.
The surge in the beginning of 2018 is partially noise related to a change in regulations. However, an elevated level of growth is still occurring. In the most recent quarter, allowance for credit losses in mortgages increased 6.9% from the previous year. To contrast, mortgage debt outstanding only increased 5.4% from the previous quarter.
Allowances For Credit Losses Growth
The 12-month growth rate for the allowance for credit losses on mortgages, compared to mortgage credit growth.
Source: BoC, Better Dwelling.
The allowance for credit losses on mortgages is rising from historic lows. The increase, while substantial, is partially due to normalization of the trend. Losses and defaults have been sitting at historic lows over the past few years. Recently, as liquidity tightens in some markets, they’ve been rising. A similar trend is occurring with insolvencies, which are also fast rising from historic lows.
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Pretty funny considering banks know they’re keeping less than the required amount on books to deal with losses. There’s a reason they’re called “unexpected losses.” If they expected them, they could be avoided.
Canada is funny in this way. If you default on a loan, you can get to keep your house. The house is probably drained of credit, and you’ll have to pay much more in interest… but Canadians will hand onto that house.
What’s the exact process, do you have to mortage up to the market value? I have a hard time visualizing it.
This is what’s considered a win-win.
The lender doesn’t want the asset (especially if the price/market is depressed), they want the income stream that comes from the loan. IFF the borrower CAN’T fulfill their obligation then why not renegotiate with them to get as much of the value as the lender can?
Repossession and sale are still tools the banks could exercise but it’s at their discretion. It’s not the same dynamic as the states where the borrower was able to hand the asset to the lender (except sask & alberta).
https://www.macleans.ca/economy/realestateeconomy/heres-how-canadians-could-walk-away-from-their-homes-if-house-prices-fall/
This avoids the whole negative feedback loop / fire-sale issue that happened in the states.
Even the banks are saying don’t remove the stress test. Improved quality of loans coming to market, and credit growth is returned. Although I generally agree with the industry, that this is a demand push forward – not a credit growth resurgence.
“CEO of Canada’s biggest bank calls for caution as Ottawa considers adjusting mortgage stress test”
https://business.financialpost.com/news/fp-street/ceo-of-canadas-biggest-bank-calls-for-caution-as-ottawa-considers-adjusting-mortgage-stress-test
The sad part of the stress test? It disallowed lower income earners to join in the party over the last 2 years, anywhere outside of Toronto.
Instead of allowing lower income earners to buy a house 2 years ago, and seeing most of those houses double (again, outside Toronto), the stress test removed these people from the party. Only those with significant financial resources were able to take advantage with the stress test in place.
I understand the purpose of the stress test and what it’s meant to do / why it was implemented. However, talk about shortchanging possible house lottery winners in this once in a lifetime housing frenzy. Those that the stress test was set up to help have been left out in the cold.
houses doubled in the past two years? what are you smoking?
Outside Toronto and moving eastward, you got it! Houses that were going for $250k are selling for $499k. And it’s not even close. They are selling within a weekend.
These same houses in TO would be selling for $650k+. Especially the east side of Ontario has seen HUGE gains since mid-2016. Nothing prior to that.
“Those that the stress test was set up to help have been left out in the cold.”
You mean the banks?
Since it was built to protect the banks from themselves. It only protects an individual in a round about way … kinda like stopping a child from touching a hot stove.
And here we have it … a bank asking for this protection to remain in place.
Possibly worth discussing earlier than later – if the US2008 is any example, a real estate collapse may lead to a bank bailout, and that wont help Canadians.
There are 30 Schedule 1 banks in Canada. Collectively, the top 5 make $10B in profit every 90 days, or a total of about $112,000,000 per day. $2.53B is 22 days of bank *profit.
It’s peanuts and profit is not a right.
The government created the problem of increased housing prices. It has hurt common Canadians because they can’t afford their houses. Banks could draw on their own reserves, and the government could help Canadians.
Officially, the Policy is no Canadian banks can be bailed out.
https://www.bnnbloomberg.ca/ottawa-publishes-final-bail-in-banking-rules-to-avoid-taxpayer-bailouts-1.1060798
BUT during the 2008, US Subprime crisis. Canadian banks did received a SECRET bailout by non other than the US Fedral Reserve who are actually acting as the World Bank and will rescue anyone who is “Too Big To Fail”. This means they could take over Walmart or MacDonalds even.
https://www.policyalternatives.ca/publications/reports/big-banks-big-secret
Bottom line it is all corruption. They cannot stop inflating the bubble otherwise the entire Canadian economy will collaspe, because it depends on inflating the house prices by increasing immigration.
I agree that it’s all corruption.
Like climate change, we might cowardly endure it rather than stand-up but we’re pathetically leaving the problem for our doomed children to fight.
Hand-up if you think that’s ok.