CMHC Finds Toronto and Vancouver Mortgage Debt Ratios Fall, But Not As It Seems

Canadian mortgage debt indicators are looking better, but the state-owned housing agency is putting a big asterisk beside them. Canada Mortgage and Housing Corporation (CMHC) data shows the mortgage debt to income ratio made a sharp drop in Q2 2020. Typically this would mean households had a sudden windfall, and can suddenly handle their debt a lot better. Unfortunately, that’s not the case. This has to do with the impact recent government transfers have had on these ratios.

Mortgage Debt To Income Ratio

The mortgage debt to income (DTI) ratio is the percent of outstanding mortgage debt to disposable income. If mortgage debt grows faster than income, the ratio increases. If income grows faster than debt, the ratio falls. Analysts and economists use this information as guide for household debt management. Sudden and sharp rises usually mean people are spending faster than they can make money.

The CMHC notes under normal circumstances, a falling ratio would mean an improvement. However, during the pandemic, this indicator is a little broken. Currently the ratio is falling in most cities, while primary income has decreased. The state-owned insurer found primary income fell 7.4% in Q2 2020, while mortgage debt was rising. This would normally lead to a rising ratio.

Government transfers change this ratio dramatically though. The organization estimates CERB boosted incomes by about $50 billion in the quarter. This worked out to nearly 13% of total income. To put it bluntly, government assistance was larger than the amount of income lost. Hence the falling mortgage debt to income ratios, since they’re calculated in aggregate.

Canadian Mortgage Debt To Income Is Over 105%

Mortgage debt to income (DTI) made a sharp decline across the country. The national ratio fell to 105.35% in Q2 2020, down from 115.08% the previous quarter. The ratio is down 9.01 points from the same month last year, and the lowest ratio since 2013. Depending on what real estate market you’re looking at, the impact varied from city to city.

Canada Mortgage Debt To Income Ratio

The ratio of mortgage debt to disposable income across Canada.
Source: CMHC, Better Dwelling.

Toronto’s Mortgage DTI Fell Over 8 Points

Greater Toronto households made one of the smaller drops, but it was still large. The mortgage debt to income ratio fell to 141.05% in Q2 2020, down from 148.24% during the same quarter last year. The peak was in 2018, when the ratio reached 149.06 –  just over 8 points. Greater Toronto is seeing the mortgage DTI drop, but not nearly at the level the rest of Canada.

Canada Mortgage Debt To Income Ratio

The ratio of mortgage debt to disposable income for selected markets.
Source: CMHC, Better Dwelling.

Vancouver’s Mortgage DTI Fell Over 21 Points

Greater Vancouver households made one of the sharpest drops in mortgage DTI ratios. The ratio fell to 152.84% in Q2 2020, down from 168.17% during the same quarter last year. Mortgage DTI ratios for Q2 peaked in 2018, and the ratio is now down 21.88 points from then. Greater Vancouver’s drop is much higher than the national level. 

Generally, the mortgage debt to income ratio is falling across the country, but it doesn’t mean what it should. Government transfers like CERB didn’t just support incomes, but boosted them in aggregate. As these programs fade, we should see the ratios return close to pre-pandemic levels. There’s actually a possibility they may be higher, since mortgage debt is still rising.

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  • Ethan Wu 4 years ago

    Important to keep in mind older people usually have lower ratios, because their house is almost (or totally) paid off. People in their 30s and 40s have the bulk of this debt.

    It never fails. I always see some guy go “it’s just one year of work!,” not understanding more than half the population has no mortgage debt.

    • OM 4 years ago

      Similar to the skew of population growth. Recent immigrants aren’t likely to own a home, so they dilute the ratio by a few bps every year.

      Doesn’t mean those with higher debts are better. Just means the ratio is being managed at a macro level for failure.

  • Pete 4 years ago

    Canadians are aiming for a second lockdown so they can get more of that sweet, sweet CERB money.

    • James Wilson 4 years ago

      Since it’s measured in aggregate, the demographic getting CERB isn’t necessarily the demographic getting a mortgage deferral.

      Hard to make a real assessment of what’s happening without an asset and transfer breakdown, which the government would never provide.

  • yang yun 4 years ago

    Govt transfers went to those who don’t need it. Just went to boost savings of middle class,

    • Dave 4 years ago

      Yep. It’s amazing how many students and adult children still living at home qualified for the whole thing just because they made the minimum $5k last year from part-time and summer jobs.
      Lots of Tik Tok videos of these people opening up their Amazon packages and thanking “daddy trudeau” for the money that paid for it.
      The taxpayers of Canada helped add a few billion to Jeff Bezo’s wealth.
      In the mean time, not so much as a small one time tax credit for all the people who kept working through the pandemic and kept the economy and the country running.

  • Frank 3 years ago

    I’m unclear why CERB would lower the DTI, maybe someone can clarify for me.

    My understanding is that in order for it to lower the DTI, people who have household debt were previously making LESS than they are receiving in CERB payments. To me, that just seems very unlikely considering they would barely be able to service that kind of loan payment. The demographic receiving CERB typically are not home owners – I’m assuming.

    Does DTI include income without a mortgage (non-homeowners) as well?

    • Ian 3 years ago

      DTI is aggregate debt to aggregate income. If you have very little debt, but CERB more than replace income, you have lower DTI.

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