Analysis of the Canadian residential mortgage market

The head of the Canadian banking regulator recently said he was "pleasantly surprised by how well Canadians managed mortgage payment increases" . This was echoed by others in the financial sector, who also noted the resilience of Canadian homeowners. This resilience will be needed over the next 24 months, as they continue to navigate the impact of higher interest rates and economic uncertainty when they renew their mortgages.

Overall, homeowners continue to show lower credit arrears than renters, and while mortgage arrears remain low by historical standards, they have started to increase.

Recent CMHC analysis shows that further increases in mortgage arrears (see Glossary for full definitions) over the next 6 to 12 months is likely, with more significant increases in Toronto and Vancouver. In these 2 cities, mortgage arrears rates may reach levels consistent with those recorded between 2010 and 2015.

Using data obtained from Equifax, our team assessed the best predictors of mortgage arrears in 9 major Canadian markets: Halifax, Montreal, Ottawa, Toronto, Winnipeg, Saskatoon, Calgary, Edmonton and Vancouver.

Two main findings emerged from this analysis:

1. The health of the resale housing markets plays a critical role in predicting mortgage arrears

   When sales activity slows, signaling a "cooling" market, homeowners struggling with mortgage payments have fewer options to sell and avoid falling into arrears. The sales-to-new-listings ratio is an important indicator of mortgage arrears. We normally see a decline in sales-to-new-listings 6 to 12 months prior to an increase in arrears.

2. Arrears in non-mortgage credit products, such as credit cards and auto loans, are an early predictor of mortgage arrears

   Initially, there is negative correlation between changes in non-mortgage and mortgage arrears when observed with an 18-month lag. This suggests that when financial pressures begin, homeowners often prioritize keeping up with their mortgage payments at the expense of other debts.

   However, within 6 to 12 months, early signs of trouble in non-mortgage debt are generally related to increased mortgage arrears.

A tale of 3 stories

Three distinct groups of cities emerge from our analysis:

1. housing markets that may not go through sharp increases in mortgage arrears
2. housing markets that may go through sharp increases in mortgage arrears
3. a mixed group that deserves further monitoring

Calgary, Saskatoon and Halifax are in the first group. Mortgage arrears rates in these cities are expected to remain close to their low post-covid levels. We expect relative stability in their mortgage arrears rates over the next few months.

Winnipeg also appears stable, though recent trends show a sharp decline in average credit scores and an increase in non-mortgage credit arrears which could signal upward pressure on mortgage arrears in the future.

Toronto and Vancouver are in a completely different situation and arrears rates are expected to increase in these cities. Our modelling shows Toronto may reach mortgage arrears rates unseen since 2012.  

While arrears rates are not expected to rise as much in Vancouver, they could reach levels like 2015. The high number of listings relative to sales in Toronto and Vancouver is likely limiting the exit strategies for current homeowners seeking to sell their unit, diminishing market fluidity.

This, combined with increasing non-mortgage arrears, creates conditions likely to result in increasing mortgage arrears in the future.

This could potentially be avoided if mortgage rates decrease more than expected or if market conditions, as measured by the sales-to-new-listings ratio, revert into sellers' market territory, where there are significantly more buyers than sellers. 

Montreal, Ottawa and Edmonton are showing mixed results and warrant further monitoring as conditions evolve. While their projected mortgage arrears rates are expected to remain within their post-Covid range, we anticipate sharp increases in non-mortgage credit product delinquencies for all 3 cities.

What to expect next?

When interest rates started rising in 2022, many experts cautioned that the full impact of monetary tightening would not be felt for 18 to 24 months.

Even though rates recently started decreasing, we are still very much in restrictive monetary territory, and it will take several months before the full extent of easing is felt across Canadian housing markets.

Meanwhile, many Canadian households will continue to experience the burden of the "mortgage renewal shock" along with the effects of inflation, which have eroded discretionary income and made it more challenging to cope with rising mortgage costs.

Our most recent Residential Mortgage Industry Report revealed that at least 1.05 million mortgage consumers face a renewal in 2025 at significantly higher interest rates than when they were contracted.

At the same time, the labour market is easing, and unemployment is rising nationally. This shift could increase financial pressures for many Canadian households, potentially pushing some into arrears as they struggle to make ends meet.

RBC recently stated they saw the Canadian job market as a bigger risk to the economy than mortgage renewal. This combined with the increase in non-mortgage arrears across many centres and buyers' market conditions in Toronto and Vancouver reinforces our view that we need to keep a close eye on mortgage arrears over the next 6 to 12 months.

Even if Canadians continue to draw on their remarkable housing resilience, significant risks still lie ahead in this uncertain economic environment.

As Canada's Housing Agency, it is our responsibility to look forward with our eyes wide-open and encourage our peers from the financial industry to continue supporting Canadians who may be struggling: alternative mortgage payment arrangements exist for homeowners facing financial challenges.

In addition, the new Canadian Mortgage Charter builds on The Financial Consumer Agency of Canada's existing Mortgage Guidelines and expectations on how financial institutions should provide tailored support to consumers with mortgages who are experiencing severe financial stress.

As an industry, complacency is not an option. To paraphrase once again the head of the Canadian banking regulator: we can't declare victory quite yet… but after early 2027 maybe we will.

Methodological notes

In this analysis, a separate Ordinary Least Squares (OLS) regression is performed for each census metropolitan area (CMA), and a Pooled Fixed Effects model, to explore factors related to mortgage delinquencies. For each CMA, individual regressions are conducted with their own sets of differenced variables including employment variables, gross domestic product (GDP), housing market and credit variables.

This analysis offers an initial understanding of factors that are related to mortgage arrears and is based on data from Equifax, 2012 Q4 to 2024 Q2. It does not capture causal effects, rather it provides a view of leading indicators of mortgage delinquencies.

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