Robert McLister
Sept. 3, 2020
Canada’s housing market is facing two conspicuous problems.
One, a historically large percentage of people could default on their mortgage next year.
Two, no one knows how big that “percentage” will be.
What we do know: Mortgage deferrals and income support programs are keeping housing buoyant. Without them, we wouldn’t be seeing record home prices this summer.
But most income support and deferral programs are slated to end in the final quarter of this year, which raises the question: How many Canadians will have to dump their homes because they can’t make the payments?
NO MORE EXTENSIONS
There’s been speculation about further government support for embattled borrowers, but at least five lender executives said that, come October when deferral applications officially end, they’ll be far less inclined to throw borrowers lifelines. The Globe and Mail is not identifying the lenders as they are not authorized to speak publicly on the matter.
Most banks have agreed to accept deferral applications until Sept. 30. After that, if folks can’t pay their mortgage or sell in time, they risk losing their home. Albeit, lenders and mortgage-default insurers will still help a small percentage of borrowers on a case-by-case basis.
When the mortgage holiday ends, Canada Mortgage and Housing Corp. (CMHC) has speculated that up to 2 per cent of insured mortgages could “experience losses.” To put that in context, in the early 1980s we saw just over 1 per cent of mortgage borrowers go into arrears, also known as 90-day delinquencies. That’s the highest Canada has ever seen to date.
“If you assume 90 per cent of the borrowers deferring payments go back to normal and 10 per cent become impaired [i.e., likely won’t ever pay], you could see the arrears rate get close to 2 per cent,” National Bank Financial banking analyst Gabriel Dechaine said in an e-mail. “The type of scenario needed to get you there is a W-shaped recovery and another full lockdown of the economy.”
More likely, the slow recovery will result in closer to 5 per cent of mortgage deferrers defaulting, he suspects. That could lift the 90-day arrears rate from 0.24 per cent to 0.9 per cent or 0.95 per cent. That’s not far off the Bank of Canada’s “pessimistic” scenario projection of 0.8 per cent for the second half of next year. The central bank says that “foreclosures would likely be much lower than arrears.”
The housing fallout will be uglier in oil-producing regions. CMHC’s data show 21 per cent of borrowers have deferred mortgage payments in Alberta, for example, versus just 10.1 and 11.1 per cent, respectively, in Ontario and British Columbia.
Six months into the pandemic, the countrywide average is still roughly 13 to 14 per cent.
HOW MANY HOMES COULD HIT THE MARKET?
The vast majority of deferrals will end by October. Few analysts expect a flood of panic home sales this year. That’s the good news for our economy and housing industry.
“The ‘deferral cliff’ doesn’t worry us right now,” Evan Siddall, CMHC’s chief executive, said in a recent tweet.
A good chunk of unemployed mortgage deferrers will sell before their lender or default insurer forces their hand. Most have ample equity and they won’t want to lose it.
Other mortgagors with interrupted income will keep their homes and live off credit or savings until they get their income back.
Housing inventory is currently at a 16-year low, notes Shaun Cathcart, senior economist at the Canadian Real Estate Association. If national housing inventory stays tight, forced sellers will be liquidating into strong demand, cushioning the price impact. If listings surge, it’s a whole other story.
One thing worth noting is that 83 per cent of people deferring mortgage payments are prime to “super-prime,” says consumer credit reporting agency TransUnion. That means a credit score of 720-plus, which historically correlates with default rates far below 1 per cent.
The biggest wild card is how long unemployment will stay elevated. In July, it was 10.9 per cent, but if we want to keep a lid on mortgage defaults, unemployment must drop below the 40-year average of 8.23 per cent, according to my economics database on Ratespy.com. That could take all of next year if you believe consensus forecasts. Then again, it depends how much more money the government earmarks for economic relief between now and then.
PROJECTING FORECLOSURES IN 2021
Determining how many people lose their homes each year is no easy task in this country. Statistics Canada doesn’t publish this data publicly, nor does our national housing agency, CMHC. But we can piece together clues.
Teranet says Ontario foreclosures (including power of sales, when a lender sells a property after the borrower defaults) last peaked after the financial crisis at 10,762 households in 2009.
Extrapolating by population, we’re talking somewhere around 27,700 foreclosures nationally in 2009. Meanwhile, at the peak of that year, 0.43 per cent of Ontario mortgages were 90-plus days delinquent (in arrears).
If we assume the arrears number will hit 0.95 per cent some time next year, as Mr. Dechaine suggests is possible, we’d theoretically be talking up to 61,000 homes hitting the market over 12 months, starting in mid-2021. That’s in addition to the people who’d sell before they’re foreclosed on. Keep in mind these are very rough estimates given that actual economic and employment conditions will be different in each province.
Note that in 2019, Canadian housing markets saw 818,000 new listings, according to CREA. And that wasn’t enough to keep markets from tightening.
If 60,000 forced sales (7.5 per cent of last year’s listings) didn’t put us in an all-out buyer’s market, it sure as heck would tame bidding wars and prices. That assumes 2009 is a good analogue; admittedly, it’s far from a perfect one.
For one thing, the unemployed in this recession are disproportionately renters. That’s one reason peak foreclosures could be respectively less this time around. And this is all just rough math.
Any way you slice it, however, we should all be prepared to keep a close watch on mortgage defaults in 2021.
But if available data and the resilience of housing amid historic unemployment are any indication, there’s no need to panic.
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