Toronto and Vancouver Real Estate See Mortgage Delinquencies Start To Climb

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.

Mortgage Delinquencies

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.

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  • GLM 5 years ago

    let the bloodbath begin

    • Ethan Wu 5 years ago

      Expensive homes mean big incomes. If they can’t pay their incomes, who thinks middle class homeowners are going to be able to handle their mortgages?

      • GLM 5 years ago

        absolutely correct Ethan Wu.

      • John Keri 5 years ago

        Totally incorrect.
        The high priced houses are speculative pyramid games based on very low interest rates.
        So-called owners borrow money against the property they do not actually own, and banks busy meeting sales targets provide the money to keep this cycle going.
        Do not believe that Steven Poloz would not understand this, so question what his motives are. This is not good for the Canadian economy, produces very low wages and no ‘backup’ plan. When speculative buyers can’t make more money, they will simply walk away and let the tax and ratepayers take the hit.

    • SUMSKILLZ 5 years ago

      I don’t think you have thought this through. Involuntary vacant home surges cause all kinds of mayhem in neighbourhoods. Divorce, violence, huge spikes in B&E’s (copper plumbing theft too), squatters, unkept properties, condo corps unable to pay bills as too many folks & banks stop paying condo fees.

      I saw it first hand in the U.S in 2008, it was not discount RE shopping awesomeness, it was very scary. It happened very quick too. People smashed and trashed their homes as they left. Bailiffs left possessions in the driveway exposed to the elements for months. Families were living out of cars in Walmart parking lots. I don’t wish that on any society.

      • Investor 5 years ago

        Thank you. That’s a very great point you made. A lot of folks don’t seem to realize that when that thing hits the fan, no one comes out unscathed. I mean, I love the prices to moderate and have a soft-landing, not in a way that creates chaos. That’s an evil wind that blows no one no good.

      • GLM 5 years ago

        it sucks that it has come to that point. no one wants anyone to suffer, But we only have ourselves to blame, we did it to our selves

      • Joseph 5 years ago

        Bang on, Sumskillz. As much as prices seem pricey in my view, I know that a ton of baggage will come with prices falling.

        Fingers crossed things don’t get AS bad as you described above.

        • Rick 5 years ago

          This is not a surprise at all. I’m actually very surprised it took this long.

      • Mousey Fahrquar 5 years ago

        That’s why the government has to bail out homeowners who get into trouble. It helps to preserve home equity for the rest of us.

        • Smaug 5 years ago

          I think you’ll be very disappointed in the government’s ability – or lack thereof – to preserve your home equity.

        • Jonah J. 5 years ago

          The government already has. That’s why we are in this mess now. They have kept rates too low for too long. They shouldn’t have dropped them in 2008 and shouldn’t have dropped them in 2015, and now we are stuck. The earlier the government pricks the bubble the less pain we will feel. They should have done it years ago. Right now it will be really painful. In a few years it will be downright ugly.

        • Ann 5 years ago

          Can you explain why you feel the government should bail out people who made bad decisions by over extending themselves? And even if the government were to do that, aren’t we promoting or rewarding folks to do the same thing again?

    • Don 5 years ago

      When you look at the graphs,(2013-2018) the mortgage delinquency rates are basically all down a lot not up. The article is actually picking a short time period in 2018. Remember the feds interfered in the mortgage market and have made it harder for people to get mortgages in late 2018.

    • MPeanut 5 years ago

      I’m with you. Honestly, I don’t even expect myself to be well enough positioned to be able to take advantage of the coming bloodbath. I just want to see some people who’ve been a little too smug about “winning” in real estate take a major L. Does that make me a bad person? I’m not sure I care.

  • Mica 5 years ago

    Gosh darn delinquents. They should lock em and throw away the keys… to their condo.

  • JJ 5 years ago

    Any guesses on what happens if BoC and the Fed slash rates again this year? Or does something like that only happen once this ball starts rolling downhill?

    Secondly, I can almost foresee asset prices increasing due to currency devaluation/inflation as much as I can see them decreasing… What is a guy to do…

    • Grizzly Gus 5 years ago

      If imbalances exist in the RE market, the currency devaluation/inflation strategy, depending on how extreme, could result in flat or rising RE prices in nominal terms however they would still fall in real terms. IE the price of almost everything else you could buy would be rising at a much faster rate………….hopefully wages as well. I think we still will see notable declines in a nominal sense but for sure some of the imbalance will be addressed through currency measures …………… If you are holding large sums of cash , near cash, or CAD denominated assets right now waiting for a “cheaper” entry point to CAD RE, you might want to reevaluate your strategy. CAD RE will do bad, our currency might do a lot worse. The reality sucks, the medicine for an economy and households that took on way to much debt is probably to bail them out by punishing the savers that did not…………….. the savers that could be the ones in a position to invest and help start the next up cycle…………. I guess its fashionable nowadays to want to make everyone equal poor.

      • Sideliner 5 years ago

        In other words, move your CAD cash to USD ASAP?

        • Grizzly Gus 5 years ago

          Thats one option……… but I’m not overly confident in the mid to long term prospects for the USD either. China shaky, Europe shaky, honestly no idea what the safest bet is right now. Best thing as always is to diversify. Don’t have too many eggs in one basket.

          • someguy 5 years ago

            That’s just it. There’s no hiding. The question “What is a guy to do…” has no easy (or even reasonable) answer. $CAD? $US? Bloated equity markets? Ridiculous CAN RE? BTC? Paper gold? A few kilos of gold buried in the (rented) backyard?

            Punish savers for a decade, then really stick it to ’em when all hell breaks loose. I’ve been mentally preparing myself for this outcome for some time, but it ain’t gonna make it any easier.

            You never know, maybe $CAD won’t be as terrible as many of us suspect. A guy can dream.

    • MH 5 years ago

      Two things:

      1) As low as the current BOC rate is, it’s up 350% in less than two years. It takes on average about 18 months for rate change impacts to become apparent.

      2) Based on the non-statistical sample I’ve seen the average current private RE loan rate in Toronto is around 12%.

      Do you really think that these prices are heading higher? I mean these prices:

      Any models predicting that currency devaluation / inflation might push prices higher ignore the fact that any such development will hit the overleveraged much harder and much faster.

      BTW, I absolutely don’t blame people deciding to pack and move instead of waiting. Unfortunately it makes a lot of sense. This is an absolutely expected outcome of the decade of unbridled RE speculation and funny-money friendly policies. There is no free lunch.

      This comment is not meant to encourage any particular decisions. Manage your risks according to your priorities.

  • P C 5 years ago

    With the CDN economy unexpectedly slowing in the 4th quarter, listings piling up. Prices at stratospheric levels. Sales moribund. China Capitol Controls. The RE industry who provides manufactured “data” and unsubstantiated claims of with the compliance of the media that desperately needs the advert revenue. CREA’s meme of “higher prices for 2019” is particularly problematic (Not sure why they are allowed to make unsubstantiated predictions taken out of vapour,The problem? RE associations control the data AND are only interested in one thing Revenue for their members. NOT THE PUBLIC! if a stock broker, did what they constantly do they would be sanctioned by the securities commission)

    There will be a lot of pain as this unwinds and many questions in the coming years. At the very least we need a public inquiry to determine how we got here. I’m thinking the Banks, CMHC, Politicians, RE industry all have contributed to this complete and absolute debacle.

    The music has stopped and the chairs have been taken away

  • Rain City Ryan 5 years ago

    I’m curious about the jump from mortgage origination value to home price. In Vancouver or Toronto a 400K+ mortgage could easily be a new entry to the market with <20% down.

    Also new entries to the market are more likely to be young and not yet at peak earning potential. Not saying that they are in a more precarious work position than the older cohort, but likely fewer assets to cushion a personal financial shock, like a job loss or unexpected bill/medical issue.

  • AJ 5 years ago

    What most people don’t understand is that even if 5-10% of the homes start selling below market prices, it starts a self feeding spiral where comps get lower and lower causing refinancing difficulties for existing home owners which in turn cause delinquencies causing them to sell at lower prices reducing comps even more. This is how a “crash”happens

  • Dusty Hill 5 years ago

    I think “liquid” should be replaced by “fluid”. How can real estate be liquid, otherwise.

  • Rana 5 years ago

    Time to lower the interest rate and 40 year amortization period

  • John 5 years ago

    I think everyone is jumping on the OMG train a bit too quick here and BD has exposed some bias allowing the narrative.

    This is a first indicator, normally BD will clarify that a trend requires many data points not just one month. Were at the presumed bottom of delinquencies so any variation is going to show an outsized %swing. Let’s wait a few months and assess what is going on.

    Keep an eye on it…. but dont start sharpening your sword just yet.

    • Jason Chau 5 years ago

      Analysts say three is enough to see a trend reversal. Toronto just printed three quarters of climbing. If it was GDP falling, it would be a recession plus change.

    • M.Bury 5 years ago

      Hey John,

      This is not the first indicator, if it were your comments would be spot on.

      1. GTA (and most other markets) average sales price peaked in April 2017 at over $920k and has been dropping ever since. In Jan ’19 it was $748k – a 19% drop. A 20% drop is usually termed a “Bear Market”.

      2. Total yearly homes sold in GTA peaked in 2016 at 113k, 2018 sales were 78k – a 30% drop. That’s a lot of sales commissions not being received and land transfer taxes not being collected.

      3. DOM in GTA was 9 or 10 in Spring 2017, it is now 30+.

      4. A significant portion (around 25%) of new mortgages over the past 2-3 years are sub-prime – they call them “alternative” – which means high interest rates, often times in the double-digits and they are rising.

      5. Countless FOMO’s have purchased investment properties over the past couple years only to rent out at negative cap rates (the owner has to kick in money each month because the rent doesn’t cover all the bills) counting on the continued value appreciation to save them, which it no longer is.

      6. In late 2016 and early 2017 Sales to New Listings was 80-90%, and very few cancelled listings. Now it’s 40-50% and for nearly a year there have been more cancelled listings each month than homes sold. That means there could be 10’s of thousands of shadow listings just waiting to be listed.

      And on it goes.

      So you have lower prices, fewer sales that are taking longer, exhausted sellers, lack of buyers, expensive credit, and investments that aren’t working out. Not to mention all the other factors brought up in the various BD articles over the past few weeks.
      There are many indicators in the the banks’ financial statements that came out this week, too.

      • John 5 years ago

        Sorry I wasn’t overly clear on what I meant.

        What I meant is this is the first time we’ve seen a reversal of the delinquencies data. With a focused view on just delinquencies we shouldn’t jump on this as gospel just yet. We need more months of data to define the trend.

        From the broad view you’ve described I am comfortable to say from my arm chair that you’re 100% right and this is a trend reversal that is developing before our eyes.

        We just cant say it has happened until the data shows that it has happened consistently… it could just be fluctuation.

  • Mani 5 years ago

    It seems BD retains its readers by giving the same kind of reports what the readers love reading no matter if the prediction comes true or not. I doubt if the readers remember at all how long BD has been making predictions in these lines.

    • Jamie 5 years ago

      I was present at the CMHC presentation BD made in 2017. The layout was average prices peak in 2017, sales drop in 2018, and spin off spending results in a recession by Q2 2019. Prices would be “minimally” impacted until the recession introduces an external shock. 2016 was their first year, when they secured funding from a big US tech firm to build predictive modeling using API.

      One thing I’ve noticed about amateur real estate investors is they dismiss reports by saying people have been saying this and that since 2008. Wong actually made a presentation at our institution explaining that it would have been nearly impossible for a substantial drop to stick prior to 2014, prices hadn’t even reached their inflation adjusted 1990 peak by then.

      Making up things up to dismiss sources might seem like a good idea, but it won’t actually convince anyone that manages enough money to actually move the needle change their mind. If you’re just spending time on the internet to make yourself feel better, you’ll get better value jerking off.

  • Sam 5 years ago

    I see 20 SOC’s per day come my way.
    Defaulting on both A banks, B lenders and Privates.

  • Rain City Ryan 5 years ago

    Boy o boy Grizz it’s looking like gold and art are on the menu for durable stores of wealth.

  • Derek 5 years ago

    This was bound to happen as OFSI moved the goal posts once again. Stricter lending criteria is making those monthly payments even harder to make. In Vancouver, or Toronto if you are lucky to own a property with a suite to offset the higher interest rates, your lucky. Otherwise, you’ve now got yearly rent increases that are going up higher than inflation, and the renoviction market for slumlords makes the only sense to help keep greedy people feeding at the trough for even longer. In Vancouver if your looking to buy a home, well then get ready to compete with all the rich immigrants, gangsters and money launderers whose pockets are way deeper than yours.

  • Zenity 5 years ago

    I don’t want to breach any thing, but I see first hand reports on these. Let me say this, the banks can absorb another 30% price drop in real estate prices. They won’t like it but a 30% drop in real estate won’t kill any of the big banks.

    I personally have seen some of my very talented reports in their early 30s leave for the stats because of housing crisis in Toronto. Pushing up real estate prices in Toronto is the dumbest thing Canada can do to itself.

    Unlike Vancouver, Toronto is where the last reserve of Canadian talent are. Maybe a much smaller base in Quebec as well.
    1. We Canadians pay / subsidies education for our young people. So if a young talent leaves for the states we not only lose all the subsequent contribution these people are going go make (taxes, tech, social contribution). We also basically give away all our education investment on these people to the states for free. It’s like raising a chicken that lays golden eggs for you. Force them into horrible living conditions so they run away.

    2. People with choices leave first, not last. By jacking up housing cost we are forcing young talent to make a choice. If someone have in demand skills they can work anywhere they want. Between the outrageous housing cost, high taxes horrible winters, well you decide.

    3. We are next to the states, high housing cost = high cost of living = high cost of labor. Our industries will be wiped out.

    4. Only top 40% of wage earners pay taxes, boomers are living longers and retiring with full tax payer funded health care. This is when we need to retain our young talent.

    This is not about millenials buying a home or not anymore. This is about the future of Canada, Toronto is not Vancouver. You lose the talent pool in Toronto you lose Canada’s future. Introduce regulations now before its too late. We don’t have another 5 years, people are already leaving. Make sure speculators can’t buy “investment” property. Any residential real estate beyond primary family home should be heavily taxed. Mortgages should not be issued to anyone who are not tax paying resident of Toronto. Foreign holders of residential real estate should be heavily taxed, Canadian or not. Put these measures in for a couple of years you will solve your revenue issue and stop speculation. Most importantly talent will want to stay in Toronto at the same time keep our wages competitive. Once these measures are in place it will give us more tools to use in the future.

    • Nobel Prize 5 years ago

      seems like you are not on the talent side. your ramblings make no sense. there is a lot of talent in Toronto and Canada. It would be best that you leave – seems like you are not a tax payer but a whiner. winners focus on winning. losers focus on winners. get a pair and work smart and make it happen. lots of opportunity in Canada.

    • Mike 5 years ago

      Why do we need talented people? We have google.

    • Realist 5 years ago

      You make valid points but its already proven between making 1 buck now or 5 bucks by waiting, many people will take the quick $1 dollar.

      There’s less emphasis on the long term sustainability (somebody else’s problem) or the damage it will do to society as a whole. Why do you care if you cashed out your million dollar house, if your kids can still afford a roof over their head. In my mind it is a system that is built on the greater fool and who would pay a million bucks+ for a pile of lumber.

  • gattu 5 years ago

    Plenty of thoughtful and analytically sound comments today, with several non-regulars adding depth to the discussion. Thank you for the insights, and please keep them coming. These days I skim BD articles, because the comments help build a more complete picture. I wish would use Disqus or something similar in the comments section.

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