Market Update for July 22

Mortgage rates are rising, but here’s why you won’t see a rash of Canadians losing their homes. Canadians will run up their credit cards, fall behind on their utilities and juggle car payments. The one thing they don’t do in significant numbers is fall behind on their mortgage payments.

GTA residents rattled by rate hikes and inflation can take some comfort in mortgage delinquency numbers that show that losing a home to the bank is a rare occurrence this side of the border. The stats from CMHC (Canada Mortgage and Housing Corp.) show Canadian mortgage delinquency rates remained low through the last global recession and other economic downturns, including the housing correction of 2017.

Loans that are 90 days or more past due — are a good indicator of mortgage default rates. In Canada, mortgage delinquency rates are still significantly lower than what you would see in the U.S. So even in the 1990s when we saw that peak, we were around .65 percent — less than 1 percent. In the U.S., when there was a recession in 2008, delinquency rates reached close to 12 percent.

By the end of last year, Canada’s delinquency rate was .19 percent, according to Equifax Canada. Ontario’s rate was .08 percent and the rate for the Toronto Census Metropolitan Area was .07 percent.

There are some tangible reasons why Canadians don’t default on their mortgages nearly as often as in the U.S. In Canada, lenders have what’s known as “full recourse” to pursue any other assets of the delinquent borrower — the cottage, cars, and other investments. The same rules don’t apply to all mortgages in the U.S., where the lender is confined to pursuing only the collateral on that loan. One of the biggest differences between Canadians and Americans when it comes to mortgages is that interest on a principal residence is tax deductible in the U.S. That incentivizes Americans to borrow as much as possible.

In the first quarter of this year, mortgage delinquencies were at .18 percent in Canada. That compares with delinquencies in 1.13 percent of credit cards, 1.83 percent of car payments, and .1 percent of home equity lines of credit, according to CMHC and Equifax statistics.

They will turn off the electricity and the heating but they will not default on their house because that’s a debt, that’s something sacred. It’s something that the bank has lent them, and they feel obligated to pay it back.

Many people are still financing their homes and other debts using capital accumulated during the pandemic. But if you’ve got more money going out than coming in, eventually that bubble will burst.

The real psychology behind low delinquency rates is a 32-year narrative of solid growth in home prices — because real estate values have consistently risen, housing is considered a safe and often profitable investment, however, that’s not the reality for everyone.

When rates rise with a corresponding drop in home prices, nothing really happens for most people, even those who bought in the market peak late last year or early this year.

Even if you bought in the suburbs and your home’s value is now down 25 or 30 percent from the market peak in February, your loan was stress tested, it was properly underwritten, and you still have your job. You can make your payments.

You just can’t do anything after this. You can’t move, so right now, nothing happens. People just make their payments. Finally, some of the Canadian homeowners’ security comes down to a little-talked-about fact — that there are more women in the Canadian workforce than in the U.S., meaning more dual-income families. That has led to a slightly higher homeownership rate — about 5 percent higher — and reduces the risk of default. If you lose your job, you’ve still got someone in that household who has an income.