Economy

Rising Mortgage Delinquencies and High Housing Costs in Canada

November 10, 2024November 10, 2024canada, Canadian debt, Cost of living, drowning in debt, foreclosures, housing cost, mortgage delinquencies, mortgage rates

The Canadian housing market is facing a mounting challenge as mortgage delinquencies and high home prices strain household budgets across the country. Several factors contribute to this pressure, including historically high property values, elevated interest rates, and the broader economic challenges facing Canadians. Analysts say there is a ticking time bomb in Canadian housing while delinquency rate rises across the country! What is to blame? High initial cost of buying homes, high interest rates, economy downturn or everything from the above? The Canada housing and mortgage corporation says that delinquency rate for mortgages is constantly increasing, but also delinquencies of other debt payments such as personal loans and credit cards. Even though the delinquency rates are on the rise the housing corporation expects a “sharp” rise in already steady delinquency rate. While many push for lowering mortgage interest rates, many Canadians can not even afford to buy a house or apartment due to extreme high cost. Even if Canadians saved up 20% for downpayment, monthly mortgage payments are just no plausible. What is the key for improving the situation? Is lowering mortgage rates enough or must there be a more radical intervention and price correction to save the sinking boat?

Let’s take a look at contributing factors and let’s see if we can see the pattern to this rising issue:

1. High Housing Costs: A Growing Concern

Housing prices in Canada remain high due to a combination of limited housing supply, rising construction costs, and significant demand from both domestic and international buyers. Cities like Vancouver and Toronto have seen rapid price increases over the past decade, driving up the national average. This situation is exacerbated by a shortage of affordable housing options, with population growth outpacing the construction of new homes. As a result, many Canadians, particularly younger buyers, find it challenging to enter the housing market or manage increased mortgage payments after buying a home. Trudeau government has introduced some long overdue policies like increasing taxes on multiple investment properties and freezing international housing investments, yet this is not enough to pull the break on rising housing prices. Even though cost of borrowing has been reduces in past few weeks, Canadians still don’t see a bigger relief. Canadian who have mortgages struggle to pay those off and Canadians who can’t afford to buy homes struggle to pay skyrocketing rents. How they say “bigger is better” can only be applied here if you are an investor and not first time home buyer or need housing to live in. If Canadian can not afford the cost of living in Canada, what can Canadian economy based on? Investments? Who is going to stay in Canada if living in Canada is beyond sustainable rates? How can an economy grow if Canadians have no money for basic necessities? Over the years, Canadians have stretched their budgets to equalize rising cost of living, now we see the pattern of overstretching and capitulations.

2. The Strain of Interest Rate Hikes

In response to inflation, the Bank of Canada raised its benchmark interest rate several times since 2022, significantly impacting borrowers with variable-rate mortgages and those renewing fixed-rate terms. As of 2024, Canadians holding mortgages with lower rates from previous years faced much higher renewal rates. According to Canada Mortgage and Housing Corporation (CMHC), about 1.2 million Canadian mortgages are up for renewal in 2025, and over 85% of these were initially set at much lower interest rates. Homeowners renewing in 2025 will face a significant hike in monthly payments, despite recent small rate cuts. The strain from these higher payments means households may have to adjust their budgets, with potential effects on consumer spending and overall economic growth. If Canadians have less money to spend, other industries and small businesses depending on residential contracts will feel the fluctuation of income, resulting in possible small business closure and rise in unemployment rates. The spiral here will just continue to grow, putting Canadians and Canadian businesses at risk of delinquencies, bankruptcies and closures. According to news outlets, Bank of Canada has put aside $2.8 Billions for bad mortgage delinquencies! What does that mean? It means their predictions are, it can and possibly will get worse.

3. Rising Delinquencies and Financial Insecurity

Mortgage delinquencies have been on the rise, particularly among alternative lenders, who often serve borrowers with less stable income or lower credit scores. CMHC reported a slight but notable increase in mortgage delinquency rates in 2024, marking a trend that could worsen as economic pressures build. In addition, other forms of debt, such as auto loans and credit cards, are also showing rising delinquencies, highlighting a broader financial strain on Canadian households. The current 90-day mortgage delinquency rate remains below pre-pandemic levels but has inched up from its record lows, signalling caution for both lenders and borrowers. Canadians have borrowed money to stay afloat, annual debt has risen unlike ever before. According to Equifax, at the end of 2020, the average debt in Canada was $72,950 excluding mortgage. Debts were a sum of credit cards, car loans, line of credits and personal loans. The combined federal and provincial net debt (adjusted for inflation) has almost doubled since 2007–2008, rising from $1.18 trillion to an estimated $2.18 trillion in 2023–2024. And here is a potential explanation why Canadians go deeper into dept! Someone has to pay the net debt. But with what money if Canadians have no money for basic human needs? How will a total government net debt be paid off if economy is in trouble due to consumer confidence issues and continuous foreclosures, delinquencies and small business closures? While high housing costs and mortgage rates fill the governments bank account, Canadians on the other hand are drowning in debt and don’t see the light at the end of the tunnel. Are mortgage delinquencies jus the beginning?

4. Prospects for Reducing Housing Costs

Lowering housing costs across Canada is a complex issue. Addressing affordability may require a combination of increased housing supply, policy measures, and potential changes to mortgage financing options. The federal and provincial governments are exploring ways to incentivize affordable housing developments and restrict speculative buying. However, substantial reductions in housing prices may not occur without broader economic adjustments. Experts believe that slight reductions in interest rates may offer some relief, but mortgage costs and housing affordability will remain challenging for many Canadians in the near future. If we take in account what a factory worker could afford back in early 2000, now during 2024 a factory manager could not afford if he or she starts new. A double brake has been pulled on Canadians for that matter! Income has risen just minimal about 2,5% annually while housing costs have been rising anywhere from 5-25% annually. Food and energy costs have increased at higher paste that the income. A perfect storm for bubble to burst! It will burst naturally with hard landings for fellow Canadians and for the government too or will there be a relief, a government controlled demolition of debt and housing costs.

Especially during and shortly after COVID, we have seen migration of Canadians across Canada. Canadians have been looking for a more affordable and more livable options in rural villages towns and other provinces. Those who have managed to find some relief in better affordability are the lucky ones. But that came also with a cost! Rural villages, towns and “cheaper” more affordable provinces have curbed up the housing prices now too! People who could not afford city living have moved 1-2 hours driving time away or have moved to a different province, now the prices in those smaller communities and other provinces have equaled out pretty much with busy cities like Toronto and Vancouver. Moving to other provinces or increasing commuting time is not an option any longer for many. Does the option stay open for work longer to make up for increased overall cost? Hopefully, many Canadians find that option still.

What we see from Trudeau government is the easier mortgage usage towards making basement apartments. I guess more Canadians will live in overpriced basement apartments before they can afford their own 4 walls.

In summary, as Canada grapples with rising mortgage costs and economic uncertainty, the housing market faces challenges that will likely require policy responses and careful financial planning by homeowners and renters alike. The persistence of high household debt, the looming impact of mortgage renewals, and rising delinquencies all underscore the need for careful consideration by both policymakers and individuals navigating Canada’s housing landscape. If nothing changes better sooner than later, Canadians will be forced to have more mortgage delinquencies, debt consolidations, bankruptcies and even foreclosures.