Don’t tell your friends, but the bottom of the Canadian real estate market is disappearing – fast. Bank of Canada (BoC) numbers show the balance of insured mortgage debt is down in Q2 2018. The decline of insured debt isn’t just negative either. The drop in the balance of insured mortgage credit is the largest in Canadian history.
Insured Mortgages
Insured mortgages are typically high ratio mortgages with downside protection for lenders. In Canada, a high ratio mortgage is one where the borrower has less than 20% equity in the home they own. In the event of a correction, lenders could easily see the borrower’s equity wiped out. If the borrower defaults or walks away from their home, the lender would lose money. Instead of allowing losses, the government requires insurance on these loans. The insurance protects lenders from taking significant losses on the loan. Just to stress this, it does not protect the borrower, like some people think.
These mortgage became very popular during the recent real estate gold rush. So popular, the buying would have to cool down, but the government decided to add measures anyway. In October 2016, the Department of Finance made it mandatory to stress test borrowers at the BoC 5 Year rate. That’s around when we see a huge drop off in the balance of debt.
We could infer that it was the stress test that resulted in the drop, but that’s the kind of conclusion banks come to. The deceleration starts before the regulations, but that’s not easy to explain. Banks never ask questions like “why did the head of the Crown Corp that oversees insured mortgages rent instead of buy?” We’re guessing it’s not because he couldn’t even get an insured mortgage, but we digress. The point is sometimes people just don’t see the risk-reward ratio. Now back to our regularly scheduled numbers.
Over $508 Billion In Mortgage Debt Is Insured
The amount of insured mortgage debt is falling from all-time highs. There was $508.82 billion of insured mortgage debt at the end of Q2 2018, down $13.6 billion from the previous quarter. That works out to a 2.61% decline from the previous quarter, and an 8.52% decline compared to last year. Turns out Canadian mortgage debt can go down.
Canadian Insured Mortgage Credit
The total outstanding balance of insured mortgage credit, in Canadian dollars. The jump in 2011 is due to a change in reporting.
Source: Bank of Canada, Better Dwelling.
Canadian Insured Mortgages Just Had The Largest Drop Ever
The balance of insured mortgage debt fell, which doesn’t happen all that often. The 8.52% decline is the largest annual drop recorded in the BoC’s data, and the next drop was almost a decade ago. We had to go all the way back to Q2 2009 to find the closest annual decline, which was 8.04%. The drop we’re seeing this year isn’t just significant, it is historic.
Canadian Insured Mortgage Credit Change
The annual percent change in the total outstanding balance of insured mortgage credit.
Source: Bank of Canada, Better Dwelling.
Canadians are pretty keen on debt, so it’s interesting to see this segment deleveraging. This type of debt is usually held by first-time buyers, also known as the first rung of the property ladder. The result could mean liquidity problems in the not so distant future, if condo buyers need to sell. Unless first-time buyers have massive down payments all of a sudden.
Like this post? Like us on Facebook for the next one in your feed.
Great analysis today.
People need to talk about the shift of bad debt onto the books of insured players in 2011 more often. I personally believe that has a lot to do with the current bubble we’re in.
Good luck flipping when the insured segment of borrower is now in “screw this, I’m just going to keep renting” mode. Reminds me of Hemingway.
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
Can you talk about it?
Insured mortgages aren’t that important. Most first-time buyers are professionals with a considerable downpayment, and a little older than they used to be. A significant number of buyers in Toronto receive the down payment from their parents.
Wow!! Please also tell us how immigration is at all time high and will drive demand… It’s funny how one day people say immigrants need a place to live and the next day they say first time home buyers get huge down payments from parents
It’s both. It’s the total rise of aggregate demand that causes prices to rise. Immigration and people that have wealthy parents are both parts of the issue.
B20 does not care how big your parents down-payment “gift” is. It’s all about income verification of the actual buyer.
The GTA market will keep crashing as the number of first time buyers evaporates.
You cant stop this train (Debt, rates, bubble prices, stagnant wages), its headed straight for the station at 580km/h. Sorry, no high speed trains here, the GO train is heading straight for the station at 50km/h!
While a lot of these measures should have happened sooner, our policy makers have at least done an ok job of shifting risk away from taxpayers and big banks. Private lenders (borrow against your own home at 4% and lend it back out at 12%+) still create exposure for the big banks, but generally speaking these individuals have lower LTVs and therefor can withstand a larger price correction before their loan would be underwater.
Similar for the bank of mom and dad who started aggressively helping their kids get a down payment together to beat the stress test before it was rolled out to all mortgages. Provided the parents have enough equity to weather the correction, at least it is only their retirement taking a hit rather than tax payers.
yes, it is answer
it’s happen When your rent accounts for more than one-half or almost equer your income.
Had Obama kick-starter insurance on all mortgages in Jan or Feb 2009, it would probably have cost as much as $100 Billion but it would have immediately stop the financial crisis was every residential mortgage would have been guaranteed by the US government and no credit default swap [CDS] would have been activated and no WS investment bank would have had to pay one cent to the crooks who had created the defective bundled mortgages. RAther Obama decided to gives WS the money to pay off the CDSs and let us have the longest recession since the end of WW II.
No WS street (or Canadian) lender should be allowed to insure against losses if the homeowner/investor defaults. That myopic policy encourages risky and corrupt business practices. Rather each homeowner and each lender should be required to purchase insurance against the homeowner/investor losing income to pay the mortgage. It is actually similar to fire insurance. While a homeowner may burn down his house for the insurance, that fear does not stop us from having fire insurance.
Also like fire insurance, it only covers the part of the “lost income” necessary to make the homeowner/investor “whole.” Thus, the homeowner/investor keeps his home and the lender get a steady stream of mortgage payments.
Like Workers Compensation Insurance in the US, a lender’s future premiums are surcharged for a bad claims record. The lender is the one who has the opportunity to check out the financial viability of the buyer and there should be dis-incentives for lender’s being careless or thinking that the lender can rely on the mortgage insurance to pay after the bank lends to a slough.
Mandatory mortgage insurance which kicks in when the homeowner has a financial shortfall, based upon some financial loss, e.g. illness, loss of employment, would stabilize the housing market. Since a down turn in the business cycle results in people losing their jobs, this insurance would insulate the residential mortgage market by keeping the flow of cash into the economy high enough to forestall a deepening recession.
Sales dropped significantly in 2017 and still low. Does it make sense to think that more people decided to save more instead of buying and those who bought had larger down payments as a result? Especially when numbers of sales shifted to condos where it is easier to have 20% down payment.
It won’t be long before we see the end of those aggravating Alpine and Capital Direct commercials!! They’ll be looking for a new business model.