Soaring Vancouver real estate prices have sent mortgage defaults in the city lower and lower. Numbers from Equifax Canada show that the number of people falling behind on mortgage payments have now hit a record low. This sounds like great news on the surface, but a look at how quickly this happened is likely a bad indicator for the market.
Vancouver Mortgage Delinquencies Fall To A Low
Mortgage delinquencies have fallen to a low in Vancouver, setting a new record. Only 0.15% of mortgages stood delinquent at the end of the fourth quarter of 2017, a 32% decline from the same time last year. The total number of delinquent mortgages is 47% lower than the third quarter of 2012, the furthest municipal number available. Yeah, I know what you’re thinking… “oh…that sounds…uh…yup.” It’s confusing if you don’t get excited at the sound of debt numbers, so let’s give this some context.
Source: Equifax Canada.
Vancouver Mortgage Delinquencies Vs. BC and Canada
We recently observed that delinquent mortgages are rapidly declining across the province of BC. The province had 0.21% of mortgages delinquent at the end of 2016, a 50% decline over the same period as Vancouver. To contrast, Canada has a rate of 0.34% mortgages delinquent, an 8.8% decline over the same period. The rate at which delinquencies declined in Vancouver and BC is more than four times faster than across the country.
Mortgage Delinquencies, Incomes, and Real Estate Bubbles
Like we’ve said before, declining delinquencies are great for banks, it’s unclear how great it is for actual housing consumers. When the rate of delinquencies deviates quickly from the baseline, one of two things are happening: Incomes are rapidly accelerating, or the liquidity of homes is starting to get frothy.
Source: REBGV, Equifax Canada, Better Dwelling.
As stated in the Toronto version of this article, mortgage delinquencies will drop as incomes rise. In this case, the price of housing is easily absorbed by the gains made in household incomes. This is common in a booming economy, because incomes are growing faster than expenses. People can save, put more away for a rainy day, and find a new (well paying) job before falling behind on mortgage payments. The rate of delinquency drops in this case, but not very rapidly. For example, Canada saw delinquencies drop 37% from 1998 to 2001, when the tech bubble sent the stock market (and incomes) soaring.
Mortgage delinquencies will also drop in a real estate bubble. People have been saying Vancouver is in a real estate bubble for years, but prices had a fairly stable walk higher until 2015 in my opinion. Real estate in the city is crazy, but this is when things went out of control. People began flipping the same home multiple times in a year, paying 30% higher from the year before, and absorbed everything on the market within days. These aren’t things rational buyers do, these are things frenzied buyers do.
Delinquencies drop in this case, because instead of falling behind – people can just list their home for sale. If it takes less than two weeks to sell your home, homeowners have little reason to fall behind on payments. We broke down this phenomenon a little earlier, and debt expert Scott Terrio from Maclean recently agreed. Doug Hoyes, Canada’s godfather of consumer insolvency consulting, also recently told us that homeowners are extracting the rapid increases in equity through second mortgages to avoid defaulting. You can probably guess why the rapid decrease in mortgage defaults isn’t sustainable.
Vancouver’s mortgage defaults have hit an artificially low number at the end of 2016. It doesn’t mean if won’t go lower, generally a change to the macroeconomic environment has to set off any significant correction. It does mean that liquidity is very high right now, and any change will be amplified as the means people are avoiding bankruptcy dry up. Unless those tech jobs we’ve been hearing about are transforming the city’s income, but there’s evidence that says otherwise.
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