Looks like mortgage stress testing came just in time for Canadian real estate buyers. Canada Mortgage and Housing Corporation (CMHC) numbers via Equifax show more borrowers turned to huge mortgages in Q4 2018. The share of large mortgages far outgrew the pace of more modestly sized ones across the country.
What Are We Looking At?
Borrowers with higher debt loads, are more sensitive to interest rates hikes. That is, as rates rise, the cost of servicing their mortgage will be more impactful on their finances. The greater the interest paid, the less money to spend or invest in the economy. That’s why we’re looking at mortgage distribution data today. More specifically, the size of mortgage people are taking out, in relation to the market.
We know, what if these people with mega mortgages have deep pockets? Some might, but the evidence that these large borrowers aren’t as well off as you would guess. The Bank of Canada warned earlier this year that 8% of mortgage holders owe 20% of the total mortgage debt. Even worse, these borrowers have mortgage debt greater than 350% of their gross income. Best case scenario, these households experience reduced cash flow and slowdown the economy. Worst case scenario… let’s just stick with the best case for today.
Over 13% of Canadians Took Out A Mortgage Over $600,000
Canadians starting with larger mortgage balances jumped in market share. Mortgages with a starting balance between $400,000 – $600,000 represented 18.92% of originations in Q4 2017. That’s a substantial increase from Q4 2016, when 17.72% of mortgages were in that range. Mortgages greater than $600k saw one of the biggest leaps, representing 13.86% of the market in Q4 2017. Mortgages of that size were just 11.64% of the market in the same quarter of 2016. Yup, over one in ten Canadian buyers at the end of last year took out over a half a million for their home.
Canadian Mortgages By Market Share
The market share of mortgage originations by dollar size across Canada.
Source: CMHC, Equifax. Better Dwelling.
Modest Mortgages Are On The Decline Across The Country
Who wants an affordable option, when you can max out your credit? Mortgages of $100,000 to $200,000 across Canada fell to 20.53% of 2017 Q4 originations, up from 18.92% last year. Mortgages between $200,000 to $300,000 represented 24.73% of originations, down from 25.97% last year. Most of the gains in larger markets, are at the expense of modestly sized mortgages.
The reasons why the B-20 mortgage stress test has been introduced gets clearer by the day. Home prices can only rise as quickly as people are willing to take out credit. People maxed out their credit as fast as they could, falling for the home shortage narrative. This created a dangerous pool of debt, as interest rates were rising. Today’s buyers shouldn’t be complaining that they can’t borrow as much as they could last year. Instead they should be thanking regulators for preventing reckless competition for homes.
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Bought at peak valuation, with interest rates near all time low. I see no problem here.
You’re being sarcastic, but it’s amazing how a little FOMO led to such panic buying. This is like when Bitcoin was at $12,000, and people started maxing out credit cards, and doing wire transfers to get in, until it hit $19,000… before collapsing down to $8,000. If being rich were as easy as borrowing money and buying what everyone else is buying, everyone would be rich.
Meanwhile, as a millennial that watched the Great Recession and the collapse of millions of loans, I won’t touch anything more than 3x my NET income.
SAME
Mo money, mo problems. Buy within your means, you’ll never be stressed.
It’s not only the $500 000 mortgage but new cars in the driveway. You can’t have a non-luxury car in front of a new luxury home. I can’t believe tha cars folks are driving these days. $900 a month, great where do I sign! Seems to be the mantra. Everyone’s liv’n the Instagram life.
Wow SUMSKILLS! I’ve very seldom seen such a concise comment so eloquently summarize such a major socio-cultural problem and I’ve been reading on average 100 comments a day for the past 15 years!
Indeed, people seem so unsatisfied with their lives in T.O. that the only thing that gives them a sense of accomplishment is not only buying a bigger house and a more expensive car – which up until a few years ago seemed enough to boost their mortal remains – but actually showing off about it on Instagram now!
What a sad society where you have to flash your “success” and “accomplishment” in people’s faces on a daily basis for someone to make you feel a little more secure about yourself.
Couldn’t agree more. The number of Range Rovers I see in the driveways of even modest homes has me scratching my head. These are $150,000 cars that are expensive to maintain.
The data would be better if it included what the mortgage debt greater/gross income ratio was per bin.
Having said that $600k is a huge amount of debt to take on, regardless of income.
No joke, look at what US$270k (~CA$350k) gets you in Houston, another city that’s roughly the same size.
https://www.zillow.com/homes/for_sale/Houston-TX/28192581_zpid/39051_rid/globalrelevanceex_sort/30.257288,-94.987106,29.375593,-95.878372_rect/9_zm/
but, but, but… Toronto is the best and safest city in the world and everyone wants to live there and willing to pay millions to get in on all the actions the city has to offer, like its world class public transit from the mid 19th century, and its fantastic healthcare with 8 hour wait times! 😉
What hole did you crawl out of? Looks like mid-2017…yes, we know TO isn’t the bees knees. Next time toss in something about it being dirty, not as good as Chicago/boston/NY and maybe a little subversive political racism a la ‘Liberal refugee problem’…I know you’re new but your C-team/Circa-2017 commentary is tiring and makes Blue mad. BD4L.
Toronto could be in for a really rough ride.
56% of household income is less than $40K.
Only 10% is > $100K.
So more than half the city can’t afford to buy anything, 90% can’t afford a 1-bedroom condo, and less than 1% can afford a small house.
And that’s with the economy currently basking in a Goldilocks moment
of low interest rates and nearly full employment.
Q4 2018 should read Q4 2017.
Power of sales and bankruptcies are on the rise … Q4 won’t be pretty but real carnage starts in early 2019.
Q4 2018 we will see power of sales and bankruptcies accelerate. its already happening in toronto, its just been kept quiet to not create a panic
References? We like data.
“Consumer insolvencies in Ontario increased year over year for the second month in a row in May. Total insolvencies increased 1.7% compared to May 2017, after an annual increase of 5.2% in April.”
It’s not a big trend for now, but there are definitely first signs.
https://www.hoyes.com/press/consumer-insolvency-statistics/
Here is another canary in a coal mine from mainstream media:
https://business.financialpost.com/personal-finance/debt/equifax-says-canadian-delinquencies-will-probably-rise-this-year
Your report states buyers should be thanking regulators for implementing the stress test as this prevented home prices from increasing…I have yet to see any home prices decrease across my city in Calgary and have not seen any slow down in activity in Vancouver or Toronto. To afford a property for a family the average mortgage is between 400K – 600K, as your report states people should be aiming for 100K – 200K?? How do you think this is even possible for the average person? Canadians are not trying to max out their purchasing power…they are forced into purchasing these large mortgages to support their families, and be in the best communities for their children. They are trying to become home owners at-least once in their life and get out of the rental world as why would they want to pay someone else’s mortgage for the rest of their life?? I don’t understand how you think one should be able to stick to a mortgage of 100-200K when home prices are at a minimum of 400K start for a 1500 square foot home. Builders and developers are not coming down in prices, rather I have seen an increase and the stress test has done nothing but make it extremely difficult for an average Canadian to become a homeowner.
I agree just normalize rates back to 5.5 instead of the 3.4 we have now at all the banks and remove stress test. If you cant afford homes at normal rates then you cant buy!