November 21, 2022
Real Estate News
RYPM
Canadian real estate is starting to see the first sign of
stress from higher interest, and normalized demand. Canadian mortgage lenders
are beginning to write off larger mortgages in Q3 2022—the largest in nearly a
decade. Credit bureau data shows this isn’t a problem yet, as the share of
mortgages written off continues to fall. Fewer new borrowers and shrinking
liquidity likely means the declining rate is just a lag.
Mortgage Loan Losses Are About Liquidity, Not Borrower
Health
There’s a lot of misconceptions around losses and low
default rates, so let’s quickly address this issue. Loan losses indicate a lack
of liquidity, not necessarily borrower health. In a booming market, anyone will
buy anything at any price, and that means a borrower struggling can sell before
defaulting. A seller needs to be forced to sell and unable to find a buyer at
the price they need for an increase in losses. Low default rates are more
indicative of a bubble than anything, whereas small increases aren’t
necessarily a bad thing.
Canadian Mortgage Loan Loss Size Surges 68% Higher
Canadian mortgage losses are making an abrupt climb higher
these days. The average loss reached $96,000 in Q3 2022, up 17.1% ($14,000)
from the previous quarter. This is a whopping 68.4% (US$39,000) higher than the
same quarter last year. Losses are taken after the value of the home is
included, so they tend to shrink as home prices rise. The last time it was this
high was all the way back in 2015, so this is a trend worth paying attention
to.
Average Canadian Mortgage Loss At Lenders
The average dollar value written off by Canadian mortgage lenders.
The Share of Mortgage Defaults Fell Even Further
The share of mortgages represented as a write-off continued
to fall. The rate fell to just 0.03% in Q3 2022, a drop of 0.01 point from the
previous quarter, and 0.2 points lower than the same quarter last year. We
couldn’t find a number this low in at least 10 years, likely setting a new
record. The unnatural number is one of the lowest in decades.
Canadian Mortgages Written Off As A Share of Total
Keeping in mind that liquidity is the biggest message here,
the data presents as a mixed message at first glance. On one hand, the losses
are getting larger, indicating buyers are rejecting higher prices, which tends
to happen as interest rates rise. People are defaulting before they can sell at
higher prices. This typically precedes an increase in the rate of defaults, as
buyers stop scrambling to buy any inventory they can find.
At the same time, the share of mortgages turning into losses
is falling. That is typical of an environment where demand is really high—some
would say “frothy.” It’s only the second quarter after interest rates began to
rise and non-payment of a whole quarter is needed to declare a default. Most
likely the share of mortgages printing losses will begin to rise to healthier
levels, especially as new mortgages slow in growth.
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