Canada’s soaring real estate prices pushed mortgage payments much higher. Equifax data shows the average mortgage payment only got a small break from low rates. Shortly after, the stimulus helped to drive home prices even higher. However, the average payment obligation is still low, since the majority bought at almost half of today’s price.
Canada’s Average Mortgage Payment Has Climbed 3%
Canadian mortgage payments are climbing, which would literally surprise no one. The average mortgage payment obligation climbed to $1,401 in Q1 2022. This is 3.2% higher than a year before, and up 12.3% when compared to 5 years ago. A few immediate thoughts pop up, here’s what comes to mind from our perspective.
Low Rates Only Provided Temporary Relief Before Making Things Worse
Why is the growth of mortgage payments so small? It’s not, it’s just small in contrast to the sky-high growth home prices have seen. In reality, the average weekly wage grew 1.9% while mortgage payments grew 3.2% over the past year. This is a historic trend, which explains why it’s become more and more difficult for new buyers to buy a home. Wages didn’t grow fast enough to support home prices, so cheap debt did the heavy lifting for price growth.
In the above chart, you’ll notice one exception over the past 5 years where wages outgrew mortgages. That was during the first year of public health measures, when rates had been slashed. It provided a little relief for consumers but not nearly as much as the public was sold on. It did stimulate more buying, and soon after provided fuel for higher price growth.
That shouldn’t be a surprise at this point. Even the Bank of Canada explained over the past 30 years the impact of falling rates on home prices. They found borrowers simply borrow more money to pay for the same home. Home prices effectively absorb any additional credit, leading to higher home prices. Shocking, I know.
Most of Canada’s Mortgage Borrowers Bought When Prices Were Over 40% Lower
The number is lower than you expected, right? Despite sky-high home prices, existing borrowers pay less than young people do to rent a 1-bedroom apartment. Not just in Toronto, but virtually anywhere across the country. Amortizations provide some interesting insights for clarity here.
We keep hearing about the devastating impact higher rates will have on homeowners, but it’s just not true. Canada’s typical mortgage has an amortization of 25 years. As in people who bought within the past 25 years are still paying off their purchase. The media cycle might have you believe people move every 2-3 years, but that’s not how things work.
Most Canadians bought their home a long time ago, including those with mortgages. There’s no data set on amortizations, but we can look at the residential portfolio of RBC. Mortgage borrowers at Canada’s largest bank have an average of 19 years left. That means on average, they would have bought at least 5 years prior — when prices were 41% lower. Hiking rates on such low payments doesn’t have the same impact as people assume at today’s prices. In addition, extending the amortization is an option if these borrowers find themselves in a tough spot.
Recent buyers are a totally different issue, which the media keeps warning about. Buyers over the past two years bought at a discounted, stimulus rate. Who lends money to people with the expectation of being repaid less than inflation? The government, when they’re stimulating purchasing.
These borrowers were stress tested and warned they were essentially getting free money. They can take higher rates easily, and should just consider the recent discount, free money. The lender literally lost money in real terms lending to them.
Canada was oversold on the benefits of cheap mortgage debt, and is being over-warned about the fallout from raising rates. However, there are very real consequences to growing the cost of an essential like shelter faster than wages can keep up. The artificial stimulus can provide generational damage.