Residential Mortgage Industry Report

00:01

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00:02

[Narrator]

You're listening to In-house, Canada's Housing Podcast, where we share the latest on Canada's housing market.

00:08 (The words “Canada’s housing market” inserted in a search box appear on the screen. This is then replaced by the title of the podcast “In-House: Canada’s Housing Podcast.”)

00:17

(The host, Joelle Hamilton, appears on the screen. She is sitting in front of a microphone in CMHC’s studio.)

[Joelle Hamilton]

Hello, everyone, and welcome to our latest episode. I'm your host, Joelle Hamilton, and joining me in the studio today is Tania Bourassa Ochoa, one of CMHC's Deputy Chief Economist. Welcome, Tania.

00:23 (The camera pans to Tania who is sitting in front of a microphone across from Joelle.)

00:29

[Tania Bourassa Ochoa]

Hi, Joelle, thank you so much for having me.

00:31

(The camera pans back to Joelle and the words “Joelle Hamilton, Communications & Marketing — CMHC” appear in the right bottom of the screen, stays for a few seconds and then disappear.)

[Joelle Hamilton]

And for those of you that don't know Tania, she joined CMHC 10 years ago as a market analyst and before being named a deputy chief economist, she worked with our research team and she was working on filling data gaps in the housing finance sector. Did I, did I get that right?

(Side view of both Joelle and Tania.)

00:51

[Tania Bourassa Ochoa]

That's exactly correct.

00:52

[Joelle Hamilton]

Amazing, amazing! OK, so things have definitely changed since you were last in the studio with me.

(The camera pans back to Joelle.)

Back then in, back in May, the overnight rate was at 5% and the Bank of Canada hadn't yet made any rate cuts. And since then, they've made four rate cuts, the most recent one being on October 23^rd, and the overnight rate is now 3.75%.

(Side view of both Joelle and Tania.)

It's also going to be really interesting to see what happened with mortgage delinquency rates, mortgage debt, and the mortgage debt growth over the last kind of six months and see what's changed and what impact that has on the broader economic climate and consumer confidence. You're ready to dive in.

01:35

[Tania Bourassa Ochoa]

Let's do it.

01:36

(The camera pans back to Joelle.)

[Joelle Hamilton]

OK, let's start with mortgage debt. And so back in the spring, mortgage debt growth was slowing and it continued to slow, but it was still increasing and still at historical highs.

(Side view of both Joelle and Tania.)

Does this still hold true today? And what impact does that have on the housing market?

01:54

[Tania Bourassa Ochoa]

So, it does hold true in a way in a sense where mortgage growth is still slowish, if we could say, and it's still below average.

(The camera pans to Tania and the words “Tania Bourassa-Ochoa, Économiste en chef adjoint – SCHL” appear on the bottom left of the screen, stay for a few seconds and then disappear.)

But, despite that, obviously, and you said it, the economic context has changed quite a bit since the spring. And you know, 2024 has actually been marked by contradictory waves, if I could say. So, everything is actually moving very, very fast. And so, when we're looking at the date of the report, because obviously the data that we have access to is not necessarily up to October, but as of July, the Bank of Canada had already started to cut down the rates, so bringing the policy rate at 4.5. And so, at that stage, we still didn't see any rebound in housing activity or even mortgage activity. So which kind of explains this slowish growth in mortgage debts.

(Side view of both Joelle and Tania. Joelle is nodding.)

So, what we actually saw in the second quarter of this year is a 3.5% growth year over year compared to the previous year. And so that's bringing total mortgage debt in Canada to $2.2 trillion.

(The camera pans back to Tania.)

So, as you were saying, there's been multiple rate cuts from the Bank of Canada since and add to that the fact that there's been recent changes to our amortization as well. And so, all of that accumulated could potentially mean that mortgage activity will be picking up, you know, later on this year and in 2025.

03:38 (The camera pans back to Joelle.)

03:39

[Joelle Hamilton]

And interestingly borrowers are moving away from the traditional five-year, fixed-rate mortgages. Can you tell us why borrowers are making this shift?

03:50

(The camera pans back to Tania. The word SUBSCRIBE appears on the screen, stays for a few seconds and then disappears.)

[Tania Bourassa Ochoa]

Yeah. So again, we just mentioned the policy rate cuts by the Bank of Canada and we have to project ourselves back to July. But the anticipation and the expectation that rates will be going down down the road were very, very high, right? So, inflation was already, you know, being controlled to a certain extent. We were already seeing signs of softening in the labour market as well. So, there were strong expectations definitely from the borrower side as well that rates will be going down down the road. With this in mind, obviously, borrowers did not want to lock themselves in for a five-year, fixed rate knowing that, you know, maybe lower rates would be coming down the road. And so, with that in mind, the majority of borrowers opted for these shorter-term loans, three years, four years. So, I think 55% of them opted for these shorter-term loans.

04:47

(The camera pans back to Joelle.)

[Joelle Hamilton]

So, in this spring you mentioned that delinquency rates on mortgages and other credit products, like car loans, credit cards and home equity line of credits were increasing. And according to our latest report, delinquency rates continue to increase. What does this upward trend mean for Canada's housing market?

05:09

(The camera pans back to Tania.)

[Tania Bourassa Ochoa]

So, yeah, indeed, we saw the mortgage delinquency rates, which basically is the share of mortgage consumers that are behind on their payment for at least 90 days. And so, we've seen that rate increase to 0.20% actually in July. And so, despite these increases, it's important to note that we've been seeing these increases, but from historical lows, right? The pandemic context, you know, provided a lot of support. We also saw a very strong income growth at that time. So, we're, you know, the delinquency rate is increasing, but it's hitting it off from, you know, historical lows. So that's important to note.

(Side view of both Joelle and Tania.)

We've also continued to see delinquency rates increase for other credit products, like auto loans, credit cards, lines of credit. So, we talked about that a lot last time. And so, we're continuing to see those increases happen, but they're also seeing changes in credit behaviour.

(The camera pans back to Tania.)

So, we're seeing that some, obviously not all, but some consumers are applying to get more credits and some are also making more use of their existing revolving credit, credit cards, lines of credit, HELOCs, so home equity lines of credit and they're maintaining a higher balance as well. So, all of these are definitely signs that this financial pressure is definitely weighing on homeowners. We expect in that context mortgage delinquency rates to continue increasing and, you know, reach pre-pandemic levels by the end of the year and even in 2025. But that said, in the context where, you know, we are still facing, you know, a lot of supply challenges in the housing markets in Canada and that in most markets, I don't want to say everywhere because housing is very local. Um, because the markets are quite tight. Uh, well, if a borrower is really, uh, you know, feeling that pressure and would need to sell the property instead of defaulting on the property, the liquidity of the market; so, the ability to sell the property in a, you know, relatively quick turnaround, you know, could limit that potential or that increase in delinquency rates. But again, it's very, very different from region to region and it's different depending on the property type as well, if you have a single-family home or a condominium, for example.

07:53

(The camera pans back to Joelle.)

[Joelle Hamilton]

So, we've talked about higher household debt, which you just mentioned, renewing at higher rates and then the rising delinquencies in mortgages and other credit products. With all of these trends, I think it's important to understand the risks associated with this. What should we be concerned about?

08:13

(The camera pans back to Tania.)

[Tania Bourassa Ochoa]

So, I would say in the context where household debt is very high, the servicing cost of, you know, the monthly payments of this debt is also very high. So, what we're most worried about is the renewal cliff. And so, you know, we've updated some of our numbers in terms of the number of homeowners that will be renewing their mortgage next year and in 2026. So next year, we're talking about 1 million, actually 1.2 million plus homeowners that will be renewing their mortgages at a higher rate in 2025 and in 2026 it's close to a million. So, definitely these borrowers and I think it's 85% of these borrowers that had an interest rate approximately around between 1 and 2%. So, the difference is going to be quite significant. So again, this financial pressure is definitely being felt budget-wise. And so, we could even see, you know, effects of that in the economy, right, because people will be consuming a little bit less. We know that Canadians will prioritize their mortgage payments above other payments, but above, you know, other expenses as well. So, we could see that trickle effect on the economy for sure. But in terms of risks, there's definitely that potential concern about the ability of these borrowers to be able to make those payments, to make those payments on time. And you know, if when we're looking at the lender side, we're actually also seeing that they're seeing that risk looming on the horizon as well because we're seeing that they're increasing their expected loss provisions as well. So, you know, that money that is really put aside in case that a borrower defaults. And so, we're seeing that in their books increasing as well. So, there's definitely that risk that is looming in the horizon.

10:20

(The camera pans back to Joelle and then switches to a side view of Joelle and Tania. Tania is nodding.)

[Joelle Hamilton]

And I remember the last time you were here, you were saying that financial pressures were mounting for Canadians. And I feel like you've mentioned it again today and back in May, you were saying that the financial buffer that households accumulated during the pandemic had been exhausted. That one in four Canadians was facing food insecurity, which means that they had to cut back on either the quality or the quantity of the food that they were purchasing. And that Internet searches about financial stress and debt management were also increasing. With the recent overnight rate cuts, is there a light at the end of the tunnel for households that are renewing in 2025 and 2026? And I'm asking this because I was one of those that locked into historically low rate in 2021 and my mortgage is up for renewal in 2026. And to be honest with you, I'm freaking out. I really, I really am. So, I'm hoping that there's a slight, a slight light at the end of the tunnel.

11:27

(The camera pans back to Tania. The word SUBSCRIBE appears on the screen, stays for a few seconds and then disappears.)

[Tania Bourassa Ochoa]

Well, the question that we really need to ask ourselves is at what rate will these borrowers and you will be renewing at in 2025 and 2026. And so, we immediately think with the recent announcements from the Bank of Canada with those policy rate cuts and the expectations that they might be cutting, you know, a little bit more down the road, we might expect that mortgage rates will also continue and follow that downward trend.

(Side view of both Joelle and Tania.)

So, there are some caveats actually. And so, despite the fact that the policy rate will be potentially going down and has dropped significantly, the fixed mortgage rates have actually already bottomed up to a certain extent. So, they might go down, but not by that much. And so, I don't want to go into all of the technicalities, but long story short or simply puts, those fixed mortgage rates that were available earlier this summer, for example, have already kind of priced in those expectations of lower rates. The other thing to note is that the Bank of Canada policy rate will have much more of an impact on the variable rate. So, in that sense, if a homeowner has a variable rate or again everything that is related to lines of credit for example, you know that impact will definitely be felt.

(The camera pans back to Tania.)

So, with this in mind, you know for the 2 million homeowners that will be renewing in 2025 and 2026, you know it will be, you know, higher rates than obviously what they contracted their mortgage at earlier in 2021 – 2022, maybe a little bit slighter than what we're seeing right now, but still a difference. And so just to give you a very quick example, we're thinking about a $500,000 mortgage for example and the rates that were available for a five-year fixed in 2021, approximately 2% and what you're able to get today which is slightly over 4%, that is still a 30% difference on the monthly payments. So, you know, there is a little bit of relief, but not completely.

13:57

(The camera pans back to Joelle.)

[Joelle Hamilton]

But it was a very realistic answer and I appreciate it as someone who's been, like, thinking about what's going to happen when I have to renew. It's like, it's nice to know that I will be paying more, but not as much as some were paying when they renewed. When rates were 5%, the overnight rate was 5%.

(Side view of both Joelle and Tania.)

Thank you, Tania, so much for walking us through the residential mortgage industry report. I know it's not easy to break down all of the data and the complexities, but you honestly do it so well. Thank you.

14:33

(The camera pans back to Tania.)

[Tania Bourassa Ochoa]

Thank you so much.

14:35

(The camera pans back to Joelle.)

[Joelle Hamilton]

And thank you to our listeners for joining us in house. If you're interested in learning more, you can read the full report. The link to the report is in the description below, and we're also now streaming on Spotify, Apple Podcasts, and Amazon Music. Until next time.

14:52

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15:16
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