Canada

Mortgage Delinquencies Are Flatlining In Toronto and Vancouver Shows CMHC Data

Delinquent mortgages for Toronto and Vancouver real estate have assumed a holding pattern. Canada Mortgage and Housing Corporation (CMHC) numbers have given us a little more insight on mortgage payments. The country’s most expensive markets are seeing late payments for large mortgages bottom. That is, they’ve been refusing to go lower. In Montreal, where sales are rising, the ratio of late payments continued to fall across the board. Let’s make some sense of this.

A Quick Note On Mortgage Delinquencies

Mortgage delinquencies don’t just happen because people fall behind on their payments. People need to fall behind on their payments and not be able to sell. After all, if you can fall behind, and sell in less than 30 days, there isn’t enough time for a severe delinquency. Instead of becoming a delinquency stat, you sell and maybe even make a profit. Consequently, there’s few delinquencies in a bull market, and even less in a bubble. A lack of delinquencies says less about borrowers, than it does about liquidity.

Now that you know that, you should be looking for something very different in the numbers. Rather than looking at how low the ratio is, you should be looking for the bottom. The point where it begins to flatline, and liquidity appears to be drying up. When delinquencies won’t go lower, we’ve obtained maximum liquidity. Expect the trend to begin a reversal, as buyers disappear.

Common Market Observations

Looking at mortgage delinquencies, there’s a few quick observations that jump out. Larger mortgages start with the highest delinquency rates, and drop as sales rise. Expensive homes take longer to sell, especially during slow sales periods. The longer the time to sell, the greater the chance the mortgage will turn delinquent. The opposite is also true, when sales are increasing. During rising sales and prices, people embrace FOMO and extend their budgets. More expensive homes are picked up, and delinquencies fall.

Lower value mortgages, likely on cheaper homes, move in a similar way, but are slower to respond. Slow sales periods see a higher level of delinquencies, but less than large mortgages. When sales pick up and prices rise, delinquencies drop – but less so than larger mortgages. Since sales of expensive homes decline before cheaper ones, the trend moves the same way. You’ll see a rise in delinquencies on expensive homes, with less expensive homes to follow. There’s some exceptions, but this is the general rule.

Toronto Real Estate

Toronto is seeing mortgage delinquencies flatline with large mortgages. Delinquencies with a balance of over $400k are just off of the all-time low, and currently sit at 0.08%. For the past six quarters, delinquencies have held the range of 0.07% to 0.08%, basically holding still. Smaller mortgages (those less than $400k), have continued to fall below 0.11%. For context, higher priced homes in Toronto have seen slower sales since 2017. Lower priced homes are seeing slower sales, but the floor of pricing has continued to rise.

Toronto Residential Real Estate Delinquencies

The percent of total mortgage delinquencies for Greater Toronto real estate, by size of mortgage balance.

Source: CMHC, Equifax. Better Dwelling.

Vancouver Real Estate

Vancouver is seeing mortgage delinquencies flatline with larger mortgages as well. Delinquencies with a balance of over $400k fell to 0.09% in Q2 2017, and remained there through to Q1 2018. Those with a balance between $300k and $400k have remained between 0.1% and 0.11% for the past four quarters. Meanwhile, delinquencies below $300k have continued to fall. For context, high end home sales in Vancouver have been sliding for the past year. Lower priced segments such as condos only recently began slowing in price growth.

Vancouver Residential Real Estate Delinquencies

The percent of total mortgage delinquencies for Greater Vancouver real estate, by size of mortgage balance.

Source: CMHC, Equifax. Better Dwelling.

Montreal Real Estate

Montreal is seeing mortgage delinquencies continue to fall across all mortgage sizes. Delinquencies with a balance over $100k have declined since 2015. That was the year interest rates were last cut, reaching an all-time bottom. Montreal is one of the few cities where real estate sales continue to make modest increases. As sales in the region continue to rise, this trend is expected to continue its pattern.

Montreal Residential Real Estate Delinquencies

The percent of total mortgage delinquencies for Greater Montreal real estate, by size of mortgage balance.

Source: CMHC, Equifax. Better Dwelling.

Interest rates have increased, and so has the cost of carrying a home. This is expected to get worse, as the Bank of Canada moves towards it’s plan of “rate normalization.” In Toronto and Vancouver, sales have made big drops, making it more difficult to liquidate. These markets are likely to see delinquencies rise as a result, without a surge in sales. In Montreal, sales are on the rise, making it easier to liquidate. The market is most likely to see delinquencies continue to decline consequently.

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14 Comments

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  • Ian 4 months ago

    Since the Bank of Canada thinks real estate sales are their primary concern, I wouldn’t be surprised to see them cut rates if the line above $400k moves much higher. They’ve gotta save their rich buddies from getting crushed by their mortgages.

    • Mark 4 months ago

      err I’m not sure why you think real estate is the BoC primary concern, as core CPI is one of their leading indicators. If real estate was their primary concern they never would have started hiking rates in the first place and would have let CAD sag and the economy overheat

    • Papi 4 months ago

      They don’t have a choice, US rates are moving higher. Crush the currency, we import inflation, and inflation goes out of control. I’m seeing higher rates unless they move the CPI target.

    • Bob 4 months ago

      Ian,

      “They’ve gotta save their rich buddies from getting crushed by their mortgages”

      lol wishful thinking….However, I congratulate you for at least accepting the fact that low interest rates is what fueled the markets up to over priced values.

      Rich people buy low, sell high. when you do that enough times you do not get crushed by a mortgage especially when you buy cash.

      The Normies, act rich and brag about how thier only asset is now worth 3x what they paid for it…….. and still have a mortgage to pay

  • Cora 4 months ago

    This looks strange since there’s no flat line before 2017, correct?

  • Bluetheimpala 4 months ago

    Ian my boy! Papa Poloz already told us he doesn’t give two shits about our exuberance. We were stupid. He laid off the increase earlier in the year to give us some time but now we must continue our rate normalization or we’ll be completely sunk in 2019/2020. Can’t stop, won’t stop! Garth at Greaterfool even has some intel that there may be a Sept increase. Everything is going gang busters and there is a money grab going on before the end of days. And why would ‘rich guys’ have mortgages? Those are for the plebes right? Rich guys pay in cash and put the money into investments. Nice narrative though, my hamster had a chuckle (he is wearing a roman tunic, very caesar-esque). Tick tock. BD4L.

  • Grizzly Gus 4 months ago

    And the rich usually only have 10% of their wealth in RE. If they actually can influence Poloz they have bigger concerns than RE taking a bath.

    On a side note, did you give me 3-1 that we would not have any more hikes this year? ; )

  • Sam 4 months ago

    As a general rule, I’m always skeptical of charts with very limited “x axis”. Do you not have the data going further back? Or are you trying to pick your window to fit your narrative?
    As a frequent reader of this blog, I hope it’s the former…

  • Willy 4 months ago

    How long do you expect the mini bubble in Montreal to last before it faces the same consequences as Toronto and Vancouver?

  • Beh G. 4 months ago

    I have been talking about the demographic shift for quite some time now but there’s finally some real numbers to look at compliments of a new survey by Royal LePage and they’re quite scary.

    According to the survey 17% or 1.4 million boomers plan to sell their homes in the next 5 years. At the current rate of absorption (i.e. provided demand doesn’t dip any further) of 37,000 units per month for Canada, that’s a 63% increase to inventory just from the demographic shift in boomers!

    Not surprisingly (give it’s Royal LePage), the conclusions and headline of the story was the exact opposite, that 80% of boomers plan to stay put in the next 5 years! 😉

    It is also noteworthy that 63% in Ontario and 78% in BC said their current neighborhoods are unaffordable so while only 17% consider selling at this point the number could realistically turn out to be much higher.

  • Paul 4 months ago

    I believe there to be a direct correlation between rates dropping, prices increasing and delinquencies dropping/flatlining. It would be interesting to overlay a chart of HELOC balances over the same time frame. I suspect that as prices increased dramatically, many people were using the increased equity in their homes via HELOC’s to help subsidize and cash flow issues. As prices normalize and rates start to increase I suspect the delinquency rates to start climbing pretty quickly.

  • Dong 4 months ago

    Delinquencies will only increase when housing prices drop.

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