In today’s Konfidis Insights, we examine the indebtedness and credit health of Canadian homeowners. While there have been alarmist headlines pertaining to the “income statement” of Canadian homeowners (i.e. mortgage interest and payment as a percentage of household income), the “balance sheet” of Canadians remains strong, and much stronger than a decade ago. Further, as mortgages reach maturity for renewal, Konfidis has gleaned that Canadian mortgage lenders are overwhelmingly cooperating with borrowers by extending amortization periods, mitigating the mortgage payment increase burden due to higher rates.
In this regard, RE/MAX Canada 2023 Canada Housing Barometer Report examined average price and mortgage values between published by CMHC-Equifax across Canada to compare loan-to-value (LTV) ratios (i.e. one’s mortgage balance compared to the current fair market value of their home).
“While challenges certainly exist in today’s high interest rate environment, risk factors for the overall housing market are greatly reduced when homeowners own a larger proportion of their homes,” says Christopher Alexander, President, RE/MAX Canada. “With half of loan-to-value ratios within the 50- and 60-per cent range in Canadian markets, homeowners are better able to withstand downward pressure on housing values and fewer will find themselves underwater, carrying upside down loans.”
Nationally, LTV ratios averaged 57%; the lowest LTV ratios were found in the most expensive markets, not surprisingly, including Vancouver (50%) and Toronto (53%), while the highest ratios were found in Regina (88%) and Edmonton (83%). Notably, LTV ratios declined in eight of the twelve assessed markets over the past decade, with the greatest drop noted in London, Ontario (21%). The only markets which experienced increased LTV ratios were Calgary, Edmonton, Saskatoon, and Regina.
(Source: RE/MAX, CMHC-Equifax Canada Average Value of New Mortgage Loans; Canadian Real Estate Association; Fraser Valley Real Estate Board; Calgary Real Estate Board; Toronto. Notes regarding average prices: *Ottawa-Gatineau contains blended data to reflect the Ottawa-Gatineau CMA. Earliest statistics available for the Gatineau region are from 2014, creating an eight-year history for the CMA. ** Greater Vancouver contains data blended with Fraser Valley to reflect Vancouver CMA.)
The favourable landscape was not achieved by accident. The Canadian banks and regulatory watchdogs have acted prudently to curb home price speculation and ensure new homeowners were well-positioned to service their mortgages in an increased interest rate environment.
“Government implemented measures to reduce risk to the country’s housing markets, including the much-maligned stress test, have also gone a long way in maintaining the overall health of the Canadian market,” explains Elton Ash, Executive Vice President, RE/MAX Canada. “The housing market in Canada has a reputation for stability relative to other international markets, and prudent policy plays a substantial role.”
Canadian buyers are much better qualified than a decade ago as a result. A recent CMHC-Equifax Canada report confirmed a significant reduction in the number of buyers with credit scores under 660 in the past decade. Nationally, that number fell to 4.7% in the third quarter of 2022, down from 8.0% a decade ago.
As evidence to this improved landscape, mortgage delinquency rates fell in most markets across the country, with the national percentage sitting at just 0.14%, down 63bps from levels reported in 2012. The lowest rates can be found in Ontario and British Columbia, where the delinquency rates are below 0.08%.
“As we head into 2023, there are likely to be challenges, but a healthy number of homebuyers are expected to continue to enter the country’s housing markets from coast to coast,” says Ash. “The trend toward smaller markets should continue to play out in Atlantic Canada, Ontario and Western Canada —areas where in-migration from more expensive markets has occurred recently.”
“At the end of the day, what’s evident by the loan-to-value ratios and by policies to discourage speculation and over-extension is that real estate is and will always be a long-term hold,” explains Alexander. “The mechanisms in place to underpin stability are working, and although more challenging conditions in 2023 may cause some to temporarily take pause, the longer-term outlook remains positive. Once the Bank of Canada has signaled that it is done with quantitative tightening, the market is expected to return to more normal levels of home-buying activity overall.”
With risks related to the indebtedness of Canadian homeowners potentially overstated (evidenced by lower LTV ratios, higher credit scores, and lower delinquency rates) Konfidis views the current pause in the market as a unique buying opportunity. Furthermore, the compelling long-term supply and demand fundamentals for single-family rental ownership support a strong home price appreciation and inflation protection thesis.