Significant shifts taking place in mortgage industry: CMHC

Significant shifts are taking place in the Canadian residential mortgage landscape, according to the latest Fall 2023 Residential Mortgage Industry Report by Canada Mortgage and Housing Corporation.

“A decline in home sales led to a deceleration in new mortgage activity in the first half of 2023. Despite this slowdown, outstanding mortgage debt continued to rise, particularly for uninsured mortgages. Consumers are moving away from shorter mortgage terms, signaling lower expectations of immediate interest rate decreases. Instead, three-to-five-year terms have become the most preferred choice. The extension of amortizations beyond 25 years for most newly issued mortgages is another noteworthy trend. This suggests a shift towards longer repayment periods,” said the report.

“Our analysis indicates that some Canadians are struggling with their debt payments. Over the last six quarters, credit card and auto loan delinquency rates have consistently increased. It’s worth noting that overall mortgage arrears have remained historically low.”

Tania Bourassa-Ochoa, Senior Specialist of Housing Research for the CMHC, said the current mortgage situation is not surprising given the very strong and rapid interest rate hike. 

“It did have the effect of a cold shower on the mortgage market. So, we are seeing overall mortgage debt that has been slowing down quite drastically. But also what we’re seeing is that those early signs of financial stress on homeowners are actually intensifying. And so it’s really telling us that Canadians are having a harder time to make their payments, even mortgages,” she said.

The report said there were nearly 300,000 renewals in the first half of this year alone.

“But that’s only with (chartered banks). So that number is actually quite larger and it represents a lot,” said Bourassa-Ochoa. “It seems like a lot, but we’re only talking six per cent of all mortgages in Canada. But Canadians are really trying to find different ways to adjust to these higher interest rates. They’re trying to do what they can at renewal in terms of the terms to make those payments smaller. And so, one of the things they’re doing is choosing longer amortization periods. So that just means that you’re going to be paying for longer, but paying less in the short term. 

“And the other thing is that they’re choosing slightly longer terms on their mortgages. And it’s actually interesting because earlier last year we were seeing that people were choosing one year, two years on their mortgages because they were expecting interest rates to go down further down the road. Now we’re kind of seeing that these hopes are fading. And so Canadians are really locking in their mortgages for a longer period of time around three to four years.”

Many Canadians have faced 30 to 40 per cent increases on their mortgage payments if they were on variable rates. 

“It is actually the tip of the iceberg. And when you think about it, actually, one out of three Canadians have a variable mortgage rate. So, they’ve already been experiencing to a certain extent these higher interest rates,” said Bourassa-Ochoa. 

“But looking just around the corner, that’s when the most significant interest rate shocks are going to be felt. Because in 2024 and 2025, we’re expecting at least 1.5 million mortgage borrowers that will be renewing. And why the greatest interest shock? Because for most of these borrowers, they’ve contracted their mortgage at one of the lowest low record interest rates, but they’ve also purchased or refinanced at the peak of the housing prices. 

“So, this is really where the difference is going to be felt and where a really a bigger chunk of the budget at the end of the month is going to go towards these mortgage payments. However, delinquent mortgages are what we call a lagged indicator so what we mean by that is that if a household would be in a precarious financial situation or maybe financially strained, we wouldn’t see it as quickly in terms of mortgage delinquencies, but we would see it on other credit products.  So now when we’re looking at credit cards, auto loans or even lines of credit, we are seeing an increase in delinquencies for these products, and it is telling us that some consumers are maybe having a harder time to reimburse their debt.”

The CMHC report said alternative lenders experienced the least significant slowdown among mortgage lenders and increased their market share. Mortgage investment entities and other non-bank mortgage lenders registered notable increases in market share, year over year. In the first quarter of 2023, Canada’s top 25 mortgage investment corporations saw their assets under management grow by 7.1 per cent year over year, contributing to the growth of the alternative lending segment.

With all the turmoil in the mortgage market across Canada, Calgary continues to buck a trend when it comes to housing sales. In fact, RBC Economics said in a recent report that Calgary “remains Canada’s hottest market at this stage with sellers still holding significant pricing power amid strong competition between buyers and low inventories.”

While sales have slowed into the fall season, as of November 15, MLS transactions of 902 for the month are up 7.13 per cent compared with the same period a year ago. The median price has risen by 12.08 per cent to $498,750 while the average sale price has increased by 10.29 per  cent to $542,627, according to the Calgary Real Estate Board.

RBC said Calgary’s market has been supported by “rapid population growth and a relative affordability advantage” compared with other major Canadian cities.

(Mario Toneguzzi is a veteran of the media industry for more than 40 years and named in 2021 a Top Ten Business Journalist in the world and only Canadian)