COVID-19: A growing divide in mortgage borrowing

The economy has not yet fully recovered a year after the start of the COVID-19 pandemic but house prices continue to set records.¹ Exploring newly originated mortgage loan data can help us identify potential debt-related vulnerabilities in Canada’s housing finance system.

This analytical brief looks at:

• newly originated mortgages
• borrowers’ risk
• economic fundamentals

Rising credit scores mask a divide

The COVID-19 pandemic has impacted the Canadian housing finance environment. We saw mortgage debt grow unevenly across Canada. Non-mortgage debt declined in all major census metropolitan areas between the last quarter of 2019 and the second quarter of 2020.²

In the context of a negative economic shock, we would have expected a decline in the total number of mortgage borrowers. Instead, the total number of mortgage transactions averaged 276,401 in Canada over the last three quarters of 2020. This is up from 265,773 over the same period in 2019 and 231,064 in 2018.

Meanwhile, the average credit score of new mortgage holders has been trending upward. This is an indicator of how likely a consumer is to pay their bills on time. This average credit score rose from 770 in the last quarter of 2019 to 773 by December of 2020 (figure 1). This is the case in Canada’s largest metropolitan areas (figure 2).

An increase in the number of borrowers with very good scores — rather than a decrease in the number of borrowers with lower scores — is supporting the increase in the share of borrowers with very good scores. The share of new mortgage holders with credit scores of 700 or more has increased steadily since the onset of the pandemic. That share increased from 85.3% in the fourth quarter of 2019 to 86.1% by the end of 2020 (figure 3).

Consumers with very good credit scores also hold a growing share of the new mortgage debt issued (figure 3). This trend is consistent with the series of macroprudential measures implemented by the Government of Canada since 2010. It is therefore hard to isolate the effects of the pandemic.

Based on credit scores, the likelihood that new borrowers default may not yet represent a vulnerability of the housing finance system. In fact, borrowers with very good credit scores own the vast majority of newly issued mortgages and mortgage debt.

The labour market, however, tells a more nuanced story. Most metropolitan areas have not yet recovered from the significant job losses they have recorded since March of 2020. In the last quarter of 2020, the number of jobs in Toronto was still 80,400 lower than in the same quarter a year before. In Vancouver, job numbers were 62,100 lower in December of 2020 than at the same time the previous year. In Montréal, the loss was of 35,200 (table 1).

Table 1: Employment has not recovered since the onset of the pandemic

Source: Statistics Canada; CMHC calculations

This apparent divide between headline employment numbers and the increase in credit scores reveals the asymmetrical nature of this pandemic-induced recession. The pandemic has had a greater impact on contact-intensive industries with traditionally lower incomes. Examples include the accommodation and food services, and arts, entertainment and recreation (see figure 4).

In fact, almost all of the jobs lost in 2020 were among workers who earned weekly salaries below $800. On the other hand, as of December 2020, the number of workers earning over $1,200 weekly was 464,000 higher nationally than at the same time in 2019.³ This trend has continued early into 2021.

Consequently, there is a growing divide in the housing finance system. Since the onset of the pandemic, the number of new borrowers has been on the rise and their credit scores are improving. Low-risk borrowers own the majority of new mortgages and new debt.

At the same time, total employment has contracted in major Canadian metropolitan areas. These losses are concentrated in industries with lower wages. This suggests that the pandemic is exacerbating a divide between households that are able to obtain mortgages and those that are not.

In other words, it is likely that a group of consumers not negatively affected by the pandemic is driving new mortgage activity. Meanwhile, others have seen their ability to borrow reduced or delayed.

Larger mortgages contribute to the growing divide

As the average credit score of new mortgage holders improved, the average value of new loans increased in lockstep. The average new mortgage loan originated in the fourth quarter of 2020 increased the most since the onset of the COVID-19 pandemic in these census metropolitan areas:

• 20% in Hamilton
• 16% in Ottawa – Gatineau
• 14% in Toronto

There are many potential reasons consumers may be taking on larger mortgages:

• The rise in property prices increases collateral values and allows borrowers to access more credit relative to their income (figure 5). At the same time, homebuyers are likely to increase their borrowing to catch up with fast-rising property values.
• Consumers with higher credit scores are generally able to access more credit and thus purchase properties that are more expensive.
• Historically low mortgage rates allow consumers to afford properties that are more expensive without increasing their down payment.
• The distribution of excess savings accumulated during the pandemic is heavily skewed toward higher-income earners, as explained by the Bank of Canada.⁴ These excess savings could provide households with more capital to qualify for larger mortgages.

The pandemic has not tamed consumers’ housing market expectations. Many buyers with optimistic income prospects may accept to bid more aggressively and drive up overall market prices. The limited supply of new listings compared to sales on the resale market might have facilitated this sentiment and created more bidding wars.

As the average sizes of new mortgages and house prices continue to grow, there is a widening divide between:

• those financially affected by the pandemic (e.g. those for whom it is now harder to obtain a mortgage loan)
• those financially unaffected.

This could ultimately lead to a growing gap in access to homeownership. Consumers who have better access to mortgage credit and have been financially unharmed by COVID-19 continue to contribute to the rapid growth of housing prices. Those who have less access to mortgage credit, as well as those who saw losses in their income prospects, now face greater barriers. These barriers include:

• higher property prices
• potentially more stringent mortgage lending rules⁵

Granted, the new mortgage holders have better credit scores and likely work in higher-paying industries. This would suggest the mortgage market is not facing additional risk. However, with the average size of new mortgages becoming larger, these households are more exposed to disruption in the housing market. Therefore, an accumulation of mortgage credit within a concentrated group of borrowers could still increase the housing finance system’s vulnerability to disruption.

New homeowners face a heavier mortgage debt burden relative to their income

New homeowners face a heavier mortgage debt burden relative to their income. Growth in high-value mortgages is an important driver of the increase in the average size of new mortgage loans. In particular, the share of high-value mortgages ($600,000 and over) has increased during the pandemic, especially in (figure 6):

• Vancouver
• Toronto
• Victoria
• Hamilton

This trend might be the result of a shift in preference to single-family homes in large urban centres. It could explain the surging prices in this segment.⁶

The average national household debt-to-income ratio has decreased since the onset of the pandemic, despite the growth of high-value mortgages.⁷ However, indicators such as the household debt-to-income ratio and saving rates tend to mask the actual burden of mortgage debt. This is due to the uneven economic recovery across different sectors.

To shed more light on the financial state of consumers taking out larger mortgages, we studied the distribution of loan-to-value (LTV) ratio of the newly originated mortgage loans. According to the Office of the Superintendent of Financial Institutions’ Mortgage Loans Report (E2)⁸, the share of newly originated mortgages with an LTV ratio of 80% or more stood at 16.3% in the fourth quarter of 2020. This is very close to the levels in the same quarter of recent years.

This implies that, with house prices soaring across the country, most homebuyers were able to increase the amount they put down in order to continue meeting the 20% down payment threshold. Nevertheless, this suggests that new homeowners during the COVID-19 era now face a heavier mortgage debt burden relative to their income than those who purchased their home before the onset of the pandemic.

Overall, we observed growth in the divide between those who can obtain mortgages and those who cannot over the course of the ongoing pandemic. It is important to note that homeownership is not the only way to ensure all Canadians have a home that they can afford and that meets their needs.

New mortgage holders since the beginning of the pandemic tend to have high credit scores and take on larger mortgages. This contributes to rising house prices and prevents a growing number households from accessing the housing market. Also, it results in an overall stock of mortgage debt being held by a more concentrated group of mortgage holders. This increases the housing finance system’s vulnerability to disruption.

Additionally, those new homeowners now face a heavier mortgage debt burden (relative to their income) than those who became homeowners before the pandemic. This exposes the housing finance system and the housing markets to their ability to service their debt in the coming years.

About CMHC Analytical Briefs

This analysis is part of our new series covering various research topics. We’ll let you know about the latest housing trends, patterns and symptoms in the data when you need it. You can use the information to influence decision-making to help accelerate affordability.

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Related links

• COVID-19: Second Wave Brings Uncertainty on Household Debt
• COVID-19: An Uneven Evolution of Household Debt Across CMAs
• Housing Finance System