Canada’s largest real estate market is turning into a headache for the country’s largest bank. Yesterday we mentioned RBC’s Greater Toronto Area (GTA) mortgage portfolio has seen serious mortgage delinquencies (90+ days) soar in Q3 2024. We received a few requests for a deeper dive, so here it is. Toronto real estate may seem boring these days, but cracks are very quickly starting to appear in its foundations. Home prices in the region have barely budged in response, causing many to dismiss the issue. However, the fact that sellers are falling into delinquency instead of lowering prices reveals a much more disturbing trend.
Greater Toronto Mortgage Delinquencies Are Soaring At RBC
RBC is starting to experience some turbulence in the country’s largest market. The serious delinquency rate climbed to 0.27% for its GTA portfolio in Q3 2024. This represents a whopping 42% increase from the previous quarter, now 170% higher than last year. Slightly higher than the national average for the bank, and higher than anything seen going back to the 2017 mini-foreign buyer bubble. It’s the speed at which this breakdown is occurring that’s a more pressing concern.
Greater Toronto Real Estate Sees Mortgage Delinquencies Soar
The Greater Toronto mortgage delinquencies at RBC, in percentage points.
Source: RBC; Better Dwelling.
Looking at the above chart, one doesn’t have to be an expert to see that something isn’t right. The bank’s GTA portfolio saw the delinquency rate climb 575% over the past two years. Considering how much borrowing occurred since 2020, that’s also a lot more mortgages in absolute values than pre-2020.
Previous Market Issues Were Delayed, Amplifying Consequences
Government tools to mitigate delinquencies during a period of high scrutiny are partially behind the move. Artificially lowering the delinquency rate through temporary state-endorsed resources doesn’t eliminate the issue. It only delays the problem, eventually amplifying the negative consequences. Intervention may kick the can down the road, but it’ll still be there with more cans later. Rather than having the issue spread out, it will amplify the problem for others who could have escaped with fewer consequences.
It’s important to remember that mortgage delinquencies are primarily a liquidity issue. People try to sell before defaulting and only default after failing to do so. The delayed cohort isn’t fixed but gets distributed with the rest of the natural cohort. Sellers trying to exit before they’re distressed now have to compete with seriously delinquent ones, amplifying competition and the number of people who can’t exit gracefully.
Toronto real estate prices haven’t moved much in response, showing how many problems are piling up. There’s always a buyer for a property, but falling into delinquency first means the price was out of reach for anyone to realistically consider. The fact that prices haven’t made a significant decline indicates most of these mortgages are likely recent buyers (most likely investors), who have seen their equity wiped out and would need to pay to sell at a lower price.
Most expect Canada to engage in a demand inducement scheme to create capital cushioning. A demand inducement scheme is a form of stimulus to create more buyers by letting them access more credit so they can come up in price rather than sellers lowering price. Capital cushioning is where demand is created, knowing it won’t last forever, but transfers the risk from a group of high-risk borrowers to lower-risk ones.
The US used this strategy during the Great Recession, explaining that investors are more likely to default since they have shorter timelines and less motivation than end users. However, an end-user will struggle to avoid defaulting on their shelter, and have a longer period to ride out negative equity if need be. Horrible, but at least the blunt explanation is better than just calling it their boldest mortgage reforms ever to help affordability.
In any case, it’s the same issue as mortgage delinquencies. Delaying is the easy part. Dealing with the amplified consequences that compound the longer it occurs is where it becomes an issue. First a little, then all at once.
Most of the market’s previous issues were never eliminated but just delayed. Multiple times. It’s what people expect now, a textbook example of moral hazard. Several issues are coming to a head, and policymakers are likely to try and delay the problem again. The delay isn’t risk-free though, it applies more stress to households and requires bigger corrections to restore efficiency. It’s a strategy that works… until it doesn’t. It’s unclear if that day is soon, but no one wants to see what it looks like when an economy is so broken that even tens of billions in stimulus can’t fix it.
Toronto real estate should be in for a wrecking, but as you guys pointed out yesterday they’re going to make it so taxpayers are in for a wrecking first.
I wish you guys covered general politics because I’d love for someone to finally explain that their new strategy is just to issue loans then package the default or “relief” into general public debt. I think Punwasi is the only person to mention this in public recently and people were outraged for a minute than went back to letting the gov resume their opaque handouts.
Saw something in the Globe about this & it’s remarkable how easy it looks to steal from taxpayers when they don’t understand how credit markets work.
Which reminds me, I believe they already hid the CMHC insured mortgage debt in public debt, so taxpayers are just going to see a quiet debt accumulation. How does the CMHC tell the gov this “blurs the lines of a crisis and everyday” and no journalist in MSM bothers to write about it?
The chmc is an off balance sheet crown corp. the fundamental problem with any institution who insures mortgages is how much policy reserve they maintain. In general insurance, they typically buy re insurance for major losses, like floods or fires. So they can maintain policy reserves of 60% of premiums and stay solvent.
Anyone who watched the GFC unfold saw that in mortgage insurance that doesn’t work. Typically in an up market, houses have positive equity, so the insurance is never used – like from 2011-2024.
However, when there is a structural change or bank failure, the unfunded liabilities are exposed, and as in the USA, even a re insurer can’t afford to pay.
So currently I would estimate that $1-13tr in mortgages are insured. The reserves maintained by the chmc might be 1-3% of that. So if we see a major correction in the gta, that represents 40+% of all mortgages in Canada, the federal govt would need to fund the losses. The result if that could be another 500-700b in costs, much higher taxes and premiums for mortgages going forward.
So it’s an unmitigated disaster. Then you have the bdc and edc, both of whom have substantial sub prime loan books. So that could add another 400B.
So far Trudeau et al have spent 300-400B to subsidize housing. The net effect of this has been new home developers are not worried about dropping prices to get rid of inventory, since the can get govt money easily. Secondly various schemes like the chmc, bdc, edc, and other groups lending to substandard borrowers do not have even minimal reserves for a gta housing correction. Then there are the big 5 banks, who are already pulling back from mortgages unless insured by the feds?
So in effect, in addition to hundreds of billions wasted to maintain housing prices, there is at least as much unfunded liability in the crown corps. Then there is the very real,possibility one or more of our big 5 could need a bailout, and trigger the deposit insurance and a bank bailout?
So very little of these expenses are in the national debt yet, but this could easily double or triple it. Hopefully a new govt not run by people who can’t balance a budget for more than 2 weeks will reduce taxes, and mitigate the mess.
Problem seems largely in the condo market. Article should have analyzed different market segments. Some nice YouTube clips on that.
Sadly all the stimulus seems to do is provide for a longer amortization, yes making it more affordable by reducing monthly payments true. However a longer amortization means more payments to purchase the same home with a 25 year amortization. This will help banks become richer and the speculators who drove housing prices to astronomical heights will be given their parachute. A softer landing while those below them are stuck holding their bag. The markets have needed a correction for decades and this is just more of the same old. It has proven it doesn’t work. Lastly the PM of Canada wants to “rent” you land! I kid you not. He claims the “Crown corporation of Canada” has lots of land and the government is willing to “lease it”! In other words you can build and maintain a house on it, but you don’t own that land it sits on, leaving you 100% exposed to the “corporation” to do what they want, when they want to that parcel of land and you have no right to stop them. This my friends is nothing more than a communist government dictatorship in full bloom!
Check out Russell Matthews on YouTube. He breaks everything down in relatively easy to understand ways. Unfortunately that just makes it all the more frustrating when you realize what they’re really doing…
Struggling with my skepticism that Toronto real estate will never collapse and that chart. Holy moly, things aren’t okay.
I’m struggling with the fact I’m a homeowner in Toronto in an industry poised to make a whack of money from this and still feel like I don’t want to live here.
Toronto hired a mass influx urban planners that are all single, childless middle aged incels who thinks everyone should live like them. Any wonder why there’s so many frickin vacant rentals rn?
Residential real estate is a high risk investment, that historically paid low returns. The involvement of govt and banks has completely decoupled housing from any reasonable price controls.
For example, before mortgages, very little property was bought and sold, rents were stable, and there was no inflation. Post ww2, the hi bill, various govt schemes with banks to monetize real estate meant housing that cost 10-15% of the average pay ended up at 33%.
However in an extended period of low inflation, low interest rates, these rules were tossed out as banks sought to maximize use of their available leverage. So today we see housing costing 40, 50, 80% of pretax income? Despite so called ‘stress tests’,this has progressed without intervention, particularly with ‘investors’.
The problem now is the BoC tried to fix this mess, only to see us slip into a recession, forcing them to cut rates. The liberals have consistently acted negligently to prop up unsustainable prices?
It’s not planners behind the small units, it’s developers (and the investors who set the demand that the developers are responding to).
Planners don’t have any influence on the inside of the building beyond the use.
If there is one place that needs to take a bath figuratively and literally… It’s Toronto.
Not about what you want or think something should be. It’s about what the market wants and that’s what’s important. You kind of people need to stop interfering in the free market because of what you feel like the neighborhood should be. Nimbys and racists go hand in glove. Let the free market work, build whatever wherever based on supply and demand. Simple concept but commies can’t grasp it.
Don’t worry. The gov will bill Alberta for all of the bad loans.
It was inevitable we’d have to pay for all of the bad loans they were making. The recession hasn’t even begun yet.
Well yes. Consider that despite Trudeau hamstringing AB since 2015, Alberta’s gdp is more than half of ontarios with25% of its population. That means Albrertans are at least twice as productive as people in ON. Even worse, when the housing collapse comes, another 1/3 of ontarios gdp may be lost?
Does anyone but criminals still move to Toronto?
Since Trudeau has been in power Toronto has been receiving the basket cases of the world, and over 1 million from India! What a disaster, I’m not sure if the city will ever recover and just continue it’s fall from here.
Excellent summary. The Trudeau govt failed to reign in all the excessive monetary stimulus used to stay out of the GFC, and has effectively used real estate to cover up the massive losses in gdp from the liberals green transition. In particular, the just dumb lending during the pandemic is not only the cause of the housing cries, but also the inflation crisis.
However, because Canada’s cpi basket downplays the cost of housing more than anyone d country, we had the bizarre situation of having 15-20% annually compounded housing cost that had no effect on SC cpi?
Today we see Trudeau’s govt continuing the support of property prices that are 50-100% over fair value with strategies like 30 year amortizations, high priced chmc insured mortgages, and any other incentive to keep the inflation of housing going, particularly in the gta, which is the only path to them remaining in power.
RBC’s CEO recently said the bank is moving away from single mortgage business, and seeking to improve the quality of its book. Therefore the Trudeau govt expanding the rules and insurability was clearly directed at avoiding banks not wanting to lend….
So in summary, the market needs a large correction, both in prices, rents and taxes/development fees. Toronto real estate is far far beyond a soft landing, and the next 5 years will either require materially higher wages (which are overstated in Canada’s cpi) or a major price correction.
The reality is that the gdp of the gta excluding real estate and financial institutions 9banks, insurance, etc.) is in a deep recession. The provincial govt has overseen gdp per capita in ON has only grown in total by 6.5% since 2001. So 6.5%/22years is 0.28% per year. In the Great Lakes region of North America, only Quebec is worse. The us states, ny, pa, oh, mi, in, I’ll all grew by more than 27% during this period.
Currently the gdp per capita in on is 60k vs AB at 112k per person. Even more ludicrous is that housing costs in Ontario remain 2-3 times higher than AB? This is even worse when we look into productivity by industry. In Canada, energy and mining create 40% of our gdp, or $1.5m/worker, in Ontario manufacturing is 128k/worker, including massive subsidies amounting to 30% of that total. Real estate, particularly the financial side is 190k per worker, but when you consider that this is based on prices that are highly inflated, it’s a disaster waiting to hit.
What is clear is Trudeau, Freeland and carney are using every power they have to protect banks and speculators in the gta from the consequences of terrible risk management. Keeping prices high for another 6-9 mos is probably achievable, but will make the ultimate correction worse.
The real issue is how this govt, our big 5 banks, and everyone in the real estate industry allowed it to get this bad? I mean in history this path only leads to a banking crisis, deep recessions, and economic destruction. The only real hope is with a govt that supports Canada’s actual economy (resources) not trying to create one with borrowed money. The resources sector in Canada is already gearing up for expansion again with Trudeau and his terrible green plan in the fire where it belongs.
The problem is no so severe that we have Trudeau hiring carney who thinks that Trudeau didn’t go far enough with his carbon taxes? He is also the author of our current misfortune in housing while at the BoC, and in the uk at the boe. So apparently liberals don’t understand even middle school math.
Time to ditch the mortgage stress test?
So from 0.05% delinquencies to 0.3%. So from 5 out of 10,000 to 30 out of 10,000. If that is a “collapse” then I guess my definition of the word is a lot different than what it is here.
Considering it’s Canada’s largest bank that means the scale of default is higher than the scale of new building.
People dismiss numbers because they’re small but don’t forget this is every quarter a volume equivalent to the annual new supply is now defaulting on their mortgage and basically only a handful of people know it, and they can’t lower prices because it’s that f’d up. They said “collapsing,” but it might even be fair to say this is a collapsed at this point—prices have yet to reflect the shift.
Anyway to determine how much of this is related to HSBC acquired portfolio? The completion date was end of Calendar Q1. The chart shows the rapid increase after that. Given the details leaked about a branch in the GTA processing fraudulent income documents and lack of internal controls to validate at HSBC, perhaps it was more widespread than initially downplayed by executives.
Don’t worry the bogus international students who were caught not attending classes suddenly have thousands of dollars to spend on human smugglers who plant them on the US-Canadian border by the thousands each day.
Bank of Canada to blame, by keeping interest rates low at never heard before. Was free money, borrow for free, buy a property, put some makeup for minimum amount and as soon as it’s done, u got yourself a six figure profit in no time. And cause the money was loaned next to nothing, people kept bidding up the value of homes. This is going to be a vicious down turn spiral that will take 3 to 5 years to recover and gain the 20 to 30% that’s still to shed. I hope I am wrong.
Trudeau will step in and make sure that homeowners are not hurt. He promised to take care of homeowners and protect their investment. Tiff will be dropping rates to 0% asap to help stimulate demand and protect canadas most important industry – real estate.
“collapsing”
“0.27%
Punwasi is right. But here is ge corollary to the market I’ve keenly participated and observed for over 20+ years.
– The RE maket especially in the GTHA, Vancouver are totally inefficient
– The RE markets are also totally irrational, driven by momentum induced exuberance and hubris (backed by, at best, defective policies of the various govts – Federal, Provincial and local)
– Canada is trying to impose a “supply side” driven model on to the RE market with disastrous consequences. This results in huge prices, to begin with compounded by huger escalations in the resale markets. Unaffordability has become endemic with no end in sight.
– There has NO consistent long term planning and policy to give confidence to the average buyer/seller , but just platitudes and brushing under the carpet so to speak.
– There is a general reluctance for the govts to step in as thus brings in revenue and shows “spuriuod-at-best” growth of the GDP numbers giving misleading impetus to irrational behaviors.
These articles are well done even when the truth hurts. Been through a debt crisis and the newbies and greedies still the same no matter how many zeros are in the numbers.
What happened to my comment? Scared to leave it to be read? Censorship is here too?
This site is censored, my comment got removed for saying the truth of how we ended up with such home prices. I blamed Bank of Canada and got censured for explaining what took place. Truth hurts just like cencering the media of what’s really taking place in Ukie and the rest of the world.
Its basic economics, The more listings go up the further prices will fall. All these comments that prices have not dropped are false. The more choice, the lower the price. Defaults will just add to the lower priced properties available.
Good I hope the market tanks so bad that all homes are sub 600k again.
*Enough Crimes on a Daily Basis to deserve a Penitentiary Sentence.*