Canada

Nearly All Canadian Real Estate Markets Saw More Subprime Buyers, Including Toronto

Canadian subprime real estate buyers are scrambling to join the housing gold rush. Earlier this week, we discussed the sharp climb in subprime mortgage borrowers in Q3 2021. Today we’ll break the Equifax data down by city and show the highest concentrations. All but three major cities in Canada saw their share of poor quality credit home buyers rise. The share is relatively low compared to historic trends, but the climb is one of the sharpest in history.

Ontario Real Estate Dominates The Top Subprime Markets

Ontario has the fastest-growing home prices, and the highest rate of subprime borrowers. In Q3 2021, Windsor took the top spot, where 6.8% of buyers had a subprime credit rating. St Catherines (6.3%), Sudbury (6.2%), Barrie (5.8%), and Peterborough (5.6%) all ranked in the top 10. Ontario claimed half of the top ten markets with the highest share of subprime buyers. 

Canadian Real Estate Subprime Market Share

The percentage of new mortgages issued in each region to borrowers with subprime credit ratings.

Source: Equifax; CMHC; Better Dwelling.

Atlantic Canada claims a disproportionately large share of the top subprime markets. Despite having only six percent of Canada’s population, it claims 30% of the top ten markets. Moncton (6.4%) is the number two market. St. John’s (5.9%) and Saint John (5.7%) are also in the top 10. 

Subprime Mortgage Growth Is Up To 5x Higher In Small Cities

Canada as a whole has seen the share of subprime mortgages climb, rising 50 basis points (bps) in Q3. The biggest jumps are in St. John’s (+150 bps), Trois-Rivieres (+130 bps), and Sudbury (+120 bps). At the national level, Canada has never made such a sharp climb. Small cities are rising up to three times faster.

Canadian Real Estate Subprime Market Share Change

The change in basis points of the share of new mortgages issued in each region to borrowers with subprime credit ratings.

Source: Equifax; CMHC; Better Dwelling.

Toronto Has A Low Rate of Subprime Borrowers But Made The Biggest Quarterly Climb On Record

Toronto real estate didn’t land at any extremes for subprime trends last quarter. In Q3 2021, 3.9% of new mortgages were issued to subprime borrowers, up 30 bps from the previous quarter. It was the sharpest quarterly climb since Q1 2019. No need to panic, Toronto’s rate of subprime buyers is close to historic lows. It’s worth taking note of, though.

Vancouver Subprime Borrowers Climbed For A Second Quarter

Vancouver real estate also didn’t land at any extremes of the subprime trend. It did clock its second consecutive climb in the share of subprime borrowers, however. In Q3 2021, they represent 4.0% of new mortgages issued, up 30 bps from the previous quarter. The previous quarter broke an eight quarter streak of declines for bad credit buyers.

Most people think of defaults when they think of subprime mortgage borrowers. As mentioned earlier this week, there is a good reason for this, but it’s not the main takeaway. The share is still low historically, and large markets rarely see sharp climbs. Though they can amplify any negative market trends.

A more important takeaway is the normalization and influence of marginal buyers. Credit quality normalization is a sign things are returning to “normal.” People who can’t get a loan for a Honda Civic are driving home prices higher by tens of thousands, is also something to think about. It only takes a small share of irrational buyers to influence a larger trend

Another issue is higher prices and tighter lending should be a one-way ticket for credit quality improvements. Instead, the bank regulator is seeing an increase in the share of overleveraged mortgage borrowers approved. Add to that, Canada is now seeing more people with bad credit approved for mortgages. 

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  • Harinder Singh 4 months ago

    The only thing the Canadian banks need to do is verify borrower’s declared income with CRA. Just watch what happens then. Lots of fake income being shown to banks. Hardly anyone gets qualified on 5 year posted rates.

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