Canadians piled on mortgage debt during COVID-19. Now economists fear a ‘significant’ correction in the market
If you bought a home during the COVID-19 pandemic, chances are you took on more debt than those who bought one just ahead of the global crisis.
The total number of mortgage purchases shot up in 2020, as buyers scrambled to snag homes while interest rates were low.
According to the latest study from the Canada Mortgage and Housing Corporation, many of those new homeowners now owe far more than they earn — a problem that pre-pandemic homebuyers experienced at a lower rate.
The dramatic rise in housing debt, which now amounts to almost $2 trillion nationwide, has fuelled fear among economists, as well as the Bank of Canada, that some Canadian homebuyers are in over their heads, and exposing themselves to a correction in the real estate market.
Philip Cross, a senior economist at the Macdonald-Laurier Institute, warned on Wednesday that a “significant correction” in the housing market is inevitable.
“Either housing will become completely priced out of the reach of the average person — we’re probably close to that point already — or interest rates will go up and that will make it all unaffordable,” he told the Star.
“These prices just aren’t sustainable.”
Last week, Ottawa reported the fastest monthly increase of housing loans on record as Canadians took out almost $18 billion worth of new mortgages.
The CMHC study finds that, despite the pandemic, the total number of mortgage transactions increased four per cent in 2020, up by 10,628 transactions from 2019.Homebuyers were likelier to increase their borrowing to catch up with rapidly rising property values, while most increased their down payments to continue meeting the 20 per cent down payment threshold.
Over the course of 2020, the average mortgage loan increased 20 per cent in Hamilton, 16 per cent in Ottawa-Gatineau and 14 per cent in Toronto.
The study notes that the vast majority of newly issued mortgages are owned by borrowers with very good credit scores, lowering the risk that they might default on payments. The share of new mortgage holders with credit scores of 700 or more has increased steadily since the onset of the pandemic.
Still, the report finds that the growing size of mortgage debt increases household exposure to disruptions in the market.
“An accumulation of mortgage credit within a concentrated group of borrowers could still increase the housing finance system’s vulnerability to disruption,” it said.
Cross says new homeowners stand to lose significant wealth if — or “when,” he says — real estate prices fall.
“People are going to have all kinds of liabilities and a lot less asset. That won’t be good for peoples’ net worth, and it’s going to discourage consumer spending,” he said. “It’s hard to see a happy ending to all this.”
The Bank of Canada has warned repeatedly of growing household debt, using signs of overburdened consumers to justify new rules that make it more difficult for new buyers to take out housing loans. But the cost of real estate has shown few signs of abating, increasing home prices in remote rural areas by as much as 50 per cent.
Tiff Macklem, the bank’s governor, recently warned that interest rates won’t always be at historic lows, a sign that recent homebuyers may have higher debt loads to bear in the future. Already, the bank has indicated that rates will likely rise next year when inflation subsides. If inflation continues its rapid growth — rising 3.6 per cent in May — experts have warned that the bank may have to hike interest rates sooner.
“A significant correction could do a lot of damage,” said Pedro Antunes, chief economist at the Conference Board of Canada. “It would set back household confidence, have negative wealth effects and it would be a hit to consumer spending.”
- By Jacob Lorinc Business Reporter Wed., June 30, 2021