Canada

Canadian Mortgage Originations Fell Before Rate Hikes, Ontario Took The Biggest Hit

Fewer Canadians were taking out new mortgages, even before the rate hikes began. Mortgage origination data from TransUnion shows how originations fell sharply in Q4 2021. Not one province showed annual growth, with Ontario leading the way lower. As Canadian real estate prices climbed, fewer people were qualified to buy. This can act as friction against higher prices, as long as there is no policy intervention.

Canadian Mortgage Originations Have Begun Falling

Canadian mortgage debt is soaring but the increase isn’t being driven by new mortgages. Mortgage originations showed annual growth fall to -11.4% in Q4 2021. A contraction of this size hasn’t been seen since at least 2019. However, it isn’t unexpected after growth peaked at 48.6% in Q2 2021.

It’s easy to assume this is due to interest rates but the timeline doesn’t make sense. This was before the rate hikes and when home prices began to make the biggest climbs. A small market of very exuberant buyers had been driving prices higher by themselves.

All Provinces Have Seen Mortgage Originations Drop, But Ontario Leads

All provinces across Canada have seen mortgage originations fall lower. Annual growth in Q4 2021 fell the most in Ontario (-14.3%), Saskatchewan (-13.2%), and Manitoba (-12.3%). BC (-10.3%) also showed a very large drop but the province is underrepresented in contrast to the national drop. 

Very Large Mortgages Are In While Small Ones Are Out

A rapid rise in home prices may have something to do with the drop, as mortgage loans size shifts. Volumes contracted for mortgages smaller than $250k (-19%), and those between $250k and $500k (-15%). As for modest-sized mortgages between $500k and $750k, they showed less-than-modest gains.

Deep pocketed buyers appear to be the only growth area for mortgage originations. Those with a mortgage limit between $750k to $1 million (+35%) showed substantial growth. The fastest growing segment was mortgages $1 million and above (57%). Steep valuations pushed home prices to a market of deep-pocketed buyers.

The falling originations are often blamed on rising rates but that’s not totally true. Canada didn’t raise interest rates until several quarters after, while home prices climbed. Instead, this is likely due to the cost of housing, which is now out of the grasp of those with regular incomes.

Efficient markets help to resolve issues like this by reducing demand. Reduced demand of qualified buyers eventually reduces prices until it finds a floor. Central banks temporarily broke this concept intentionally with quantitative ease (QE), in order to drive more inflation. As that phase winda down, interest rates are normalizing demand to more typical levels. In the medium term, pending no intervention, home prices might even normalize as well.

7 Comments

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  • Marc 2 weeks ago

    A very small group of people have pumped themselves up to think home prices will rise forever, not understanding that price gains from an inventory squeeze is the definition of a bubble rise and not fundamentals.

    • Yoroshiku 2 weeks ago

      Greater Fool Theory in action.

      I’m not sure how small the group is, though.

  • Yan 2 weeks ago

    If every home in Canada costs a million, what does this do to wages? And if it boosts wages by as much as it needs homes, you better believe automation investment to reduce labor dependency will quickly come.

  • Ian Brown 2 weeks ago

    I’m honestly confused how many people are able to buy $1 million homes. My place that I bought in 2015 is worth a little more than a $1 million, but I couldn’t afford to buy it at today’s prices. I was the demographic of buyer 7 years ago but now I couldn’t buy if I tried? It makes no sense.

    • alex 2 weeks ago

      There is speculation out there that mortgage fraud makes up roughly 20-30% of mortgage originations currently. Couple that with money laundering, investors leveraging out existing properties, or people simply upsizing current properties, and there is your market.

    • Woolsock 2 weeks ago

      You’re not the only one confused, I very often wonder the same thing.

      There’s probably a little bit of everything involved. Low rates allow the borrowing, lenders won’t complaint until it gets really sketchy (like now); emotion drives the desire/need, let’s face it we’re vain and greedy people; maybe a few entities with a certain financial oomph (foreign, corporate investors and, uh, some laundering) drive, set benchmark prices and maintain them; Realtors® can’t help themselves from doing the same, sweet commissions, everything is awesome; biases and blind spots rationalize it, “It always goes up!”; Bank of Mom & Dad enable the purchases, don’t want to see kiddos struggle, advance on inheritance etc, plus grand kids; maybe a bit of fraud mixed in there so the bottom that shouldn’t be borrowing/buying in this market now can; and finally a massive lack of useful, meaningful oversight in terms of who owns what and how they came to own it – or even a wink of transparency – allow it all to flourish. They all combine to inflate this one thing way beyond rational and we continue to choose to buy it. I think, collectively, we’re in trouble.

  • J 2 weeks ago

    Money Laundering would be my guess – there’s 1 realtor for every 60 persons in the GTA. Some are definitely bad actors here (just in the GTA). Now multiply that by the entire country, add in lawyers, accountants, private lenders, brokers, inspectors, renovators, nail salons, coin laundry, corner stores, etc. etc. We’re the dirtiest country in the world and the greed has infested every aspect of our economy.

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