Canadian real estate values continue to soar, and a record number of buyers are piling into risky loans. According to the Bank of Canada (BoC), and the Ministry of Finance (MoF), high ratio mortgage borrowers are extending themselves to the limit. While we covered how concerning this trend has become in Toronto, it’s not just isolated to that city. It’s a trend that’s growing across all Canadian urban centers.
High Risk Mortgages
People taking out high-ratio mortgages combined with incomes too low for the property value, is spreading across Canada. A high-ratio mortgage is defined as a mortgage where the buyer leaves less than a 20% downpayment. The BoC and MoF have both expressed concern when high-ratio mortgages are paired with high income-to-loan ratios. The amount of high risk buyers is increasing as markets reach dizzying heights, especially in urban areas.
Vulnerability isn’t just the buyer’s ability to keep devoting a high percentage of their income to carrying payments. Since the number of these buyers are accelerating as prices get higher, they’re at a greater risk during a correction (not even a crash). Something as small as a 5% drop in value and many of these mortgages would be underwater. Underwater is industry slang for the buyer has 0, or less than 0, equity in their home. If this happens it would mean already broke homeowners would have to pay to get rid of their home. Combine that with a higher interest rate at renewal, and you can imagine the mayhem that can unfold.
Toronto and Vancouver Have The Highest Totals
High-ratio mortgages with low income levels is a growing trend in Canada, but Toronto and Vancouver take it to the next level. Across Canada, 18% of high risk mortgages have extremely low incomes for the homes they’re in, an increase of 38% over two years. Despite Vancouver’s insanely high prices, Toronto still tops the risky business of subprime borrowers. Toronto takes the top spot with a 53% increase during the same period, bringing their total to 49%. Coming in second is Vancouver which had a 25% increase over the past two years, bringing their total to 39%. These two cities are moving much faster than the average for the country, and they’re getting to dangerously high levels.
Source: Ministry of Finance (Canada), Bank of Canada’s Calculations.
Trend Is Growing Across Canada
Although Toronto and Vancouver take the cake, this trend is also growing across Canada, albeit with a lower impact. Over the past 2 years, Calgary saw a 23% increase of high ratio mortgages with at risk-income ratios, totalling 32%. Montreal saw a 30% increase over the past two years, bringing their total to 13%. Ottawa-Gatineau saw a massive 62.5% increase, bringing their total to 13%. Meanwhile, quiet little Halifax saw a 40% increase, a total of 7%. So while the issue is growing across Canada, it hasn’t reached the crisis heights of Toronto and Vancouver yet.
While Toronto and Vancouver are leading the market for risky mortgage debt, they aren’t alone. Canada has dodged the real estate commodity cycle for almost 30 years. That has produced a whole generation of people that have no idea that real estate is a cyclical market. This irrational exuberance, and the thoughts that this market will never end is placing all homeowners in a precarious situation.