Toronto and Vancouver real estate is seeing default rates climb from recent lows. Canada Mortgage and Housing Corporation (CMHC) numbers show the ratio of delinquencies is climbing in both cities as of Q3 2018. The increase is most notable for the largest mortgages, a potential sign that reduced liquidity is making an impact.
First, a quick note on mortgage delinquencies and defaults, which are largely misunderstood by experts. Delinquencies and defaults do not tell you if the size of loans are appropriate for the market. Instead, they are an indicator of a real estate market’s liquidity. Low default rates mean the market is highly liquid, and asset disposal is fast. High defaults rates mean the market less liquid, and the higher they climb the less liquidity. Let’s go through that without the technical language barrier.
In plain english, delinquencies don’t tell us a lot about income to mortgage health. Think of it this way, if you found out you couldn’t afford your home, what would you do? Those of you that can’t ask your mob boss for a loan, would list it for sale. If the amount of time it takes to sell is less than 60 days, there’s little reason to default. You can be 30 days late on your payment, list your home for sale, and sell it before being marked “delinquent.” Heck, you might even make some extra cash, and feel like a genius for not being able to pay your bills. What a glorious time to be alive, right?
Delinquencies start to rise when liquidity disappears. As real estate markets cool and public interest becomes lower, people are in less of a rush to buy. If a homeowner falls behind on their payments, they still list their home for sale. It doesn’t mean that people are in a rush to close as quickly as the seller needs. Here’s where we see an uptick in delinquencies – when buyers aren’t as motivated for a quick sale. TL;DR low delinquencies are indicative of a frothy environment, and high defaults are indicative of a lack of liquidity. The exact opposite of what most experts often say.
Toronto Real Estate Delinquencies Rise Over 28% On Larger Mortgages
Toronto CMA experienced a sharp annual uptick in delinquencies larger mortgages. The smallest mortgages ($100k or less) were 0.13% in Q3 2018, up 8.33% from the same quarter last year. Mortgages between $100k and $200k were 0.11% delinquent, flat from the year beforer. From $200k and $300k they were also flat from last year at 0.10%. Between $300k and $400k reached 0.09%, about the same as last year. The big change was in mortgages $400k and larger, which reached 0.09% – up a whopping 28.57% from the year before. More expensive homes (likely with larger mortgages) take longer to sell. The faster climb here should have been expected.
Toronto Real Estate Delinquencies By Mortgage
The percentage rate of delinquencies on mortgages in Toronto CMA, segmented by the size of mortgage at origination.
Source: Equifax, CMHC, Better Dwelling.
Looking at the recent all-time lows, we can see how much more dramatic of a shift is occurring. Mortgages delinquencies for originations $100k and smaller are up 30% from the recent low hit in Q1 2018. Between $100k to $200k is the only segment still at its recent low. From $200k to $300k, delinquencies are up 11.11% from the all time low in Q2 2018. Mortgages from $300k to $400k are 12.5% from the low reached in Q1 2018. Once again, the largest climb was in mortgages over $400k at origination, up 28.75% from the low observed in Q4 2017.
Vancouver Real Estate Delinquencies Mostly Up From All-Time Lows
Vancouver CMA is seeing a similar trend, with the largest mortgages showing a fast climb. Mortgage delinquencies for loans originating at $100k and smaller, reached 0.17% – up 6.25% from the year before. From $100k to $200k they reached 0.11, down 31.25% from the same time quarter a year before. Between $200k and $300k it fell to 0.10%, down 16.67% from a year before. Between $300k and $400k delinquencies reached 0.10%, flat from a year before. Mortgages sized $400k and up reached 0.09%, the biggest climb of 11.11% from the year before.
Vancouver Real Estate Delinquencies By Mortgage
The percentage rate of delinquencies on mortgages in Vancouver CMA, segmented by the size of mortgage at origination.
Source: Equifax, CMHC, Better Dwelling.
All but one segment showed a rise in delinquencies from all-time lows in the past few years. Mortgages delinquencies between on loans $100k and smaller are up 13.33% from Q1 2017. From $100k to $200k, is the only segment at an all-time low. Mortgages from $200k to $300k are up 11.11% from the low last observed in Q2 2018. From $300k to $400k delinquencies are up 25% from the low hit Q2 2018. Mortgages above $400k are up 11.11%, from the low last observed in Q2 2018 as well.
Canada’s largest real estate markets both saw delinquencies on larger mortgages climb. The rate is still low in the grand scheme of things, but inventory is rising and sales falling both cities. This makes it more difficult for a distressed seller to liquidate in a timely fashion. That can turn a delinquent loan into a defaulted loan fairly quickly. If this doesn’t reverse soon, expect motivated sellers to bring prices further down. After all, a home’s price is only as strong as its comp.
Like this post? Like us on Facebook for the next one in your feed.