Ontario’s Mortgage Crisis: An Alarming Financial Wake-Up Call
The financial strain on Ontarians is reaching unprecedented levels as a startling new report by Equifax reveals. For the first time, the total mortgage balance in Ontario classified as “severe delinquency” — meaning 90 days or more without payment — has exceeded $1 billion in the first quarter of 2024. This figure is twice the pre-pandemic level, indicating a deepening crisis.
Rebecca Oakes, vice-president of advanced analytics at Equifax Canada, described the situation as “a shocking number.” She emphasized that the concern stems not only from the increase but also from the continuous upward trajectory of missed payments. This troubling trend highlights the prolonged impact of inflation and sustained high-interest rates on consumers, particularly in Ontario’s costly housing markets.
The strain extends beyond mortgage holders. As Oakes pointed out, renters are also feeling the pinch with escalating rental prices. This “double whammy” of rising housing costs and the climbing unemployment rate — which reached 6.7 per cent in May 2024, up from 6.2 per cent in January — is creating a perfect storm of financial hardship.
In an attempt to alleviate some pressure, the Bank of Canada recently cut its policy interest rate by 25 basis points, the first reduction in over four years. However, mortgage brokers warn that this move is too small to offer immediate or significant relief to beleaguered homeowners.
Toronto and Vancouver, cities with the highest housing demand in Canada, are experiencing notable spikes in mortgage delinquencies. In Toronto, the rate of mortgages overdue by more than 90 days increased to 0.14 per cent in Q1 2024 from 0.09 per cent in Q1 2020. Vancouver saw a rise to 0.14 per cent from 0.11 per cent in the same period. Across the province, approximately 34,000 consumers missed a mortgage payment in the first quarter, a 23 per cent increase from the previous year.
Nationally, while mortgage delinquency rates remain below pre-pandemic levels, the overall debt burden on Canadians is growing. Provinces like Alberta, Saskatchewan, and Manitoba are witnessing some of the highest rates of non-mortgage debt and delinquency. Consumer debt in Canada rose to $2.46 trillion, a 3.5 per cent increase from the previous year. Over 1.26 million Canadians — about three per cent of the population — missed at least one credit payment, the highest number since 2020.
Auto loans and lines of credit are particularly at risk of missed payments, indicating broader financial distress. Typically, mortgages are the last type of debt to see delinquencies, underscoring the severity of the current situation. Consumers are actively seeking ways to adapt, with many checking their credit scores more often, exploring better rates, and switching lenders. Some Ontarians are even contemplating relocating to provinces with a lower cost of living to escape the financial pressure.
This growing financial strain poses a critical question: How will Ontarians navigate these treacherous economic waters, and what measures can be implemented to prevent this situation from worsening?
The Spring Market That Never Was: Canada’s Real Estate in a Prolonged Catch-Up Period
In a surprising twist for the Canadian real estate market, the anticipated spring surge in activity failed to materialize, leaving many potential buyers on the sidelines. According to the Royal LePage House Price Survey, the national aggregate home price rose 1.9% year over year to $824,300 in the second quarter of 2024. On a quarter-over-quarter basis, prices saw a modest 1.5% increase, despite a slowdown in transactions in the country’s most expensive markets.
Phil Soper, president and CEO of Royal LePage, noted the unusual dynamic of rising prices amid declining sales. “Canada’s housing market is struggling to find a consistent rhythm,” Soper stated. “Nationally, home prices rose while the number of properties bought and sold sagged; an unusual dynamic. The silver lining: inventory levels in many regions have climbed materially. This is the closest we’ve been to a balanced market in several years.”
This imbalance was particularly pronounced in Toronto and Vancouver, where market activity was slower than usual, despite increasing inventory. In contrast, the prairie provinces and Quebec experienced strong demand and tight competition due to low supply. Quebec City stood out with the highest year-over-year aggregate price increase of 10.4% in the second quarter.
Despite the Bank of Canada’s decision to cut the overnight lending rate by 25 basis points in early June, the market response was muted. Buyers who had rushed to secure deals ahead of the anticipated rate cut did not return in significant numbers once the cut was implemented. This tepid reaction highlights the need for more substantial rate reductions to enhance purchasing power and consumer confidence.
A Royal LePage survey revealed that 51% of sidelined homebuyers would resume their search if interest rates were reduced. However, only 10% were motivated by the 25-basis-point drop, with many waiting for more significant cuts to make a move. The survey indicates that a 50 to 100 basis-point reduction might encourage 18% of buyers, while 23% would need a cut exceeding 100 basis points.
When examining housing types, the national median price of a single-family detached home rose 2.2% year over year to $860,600, while the median price of a condominium increased 1.6% to $596,500. These modest increases underscore the ongoing challenges in the market, where affordability remains a significant concern.
Over the past two years, high interest rates have led to fluctuations in home prices. As the Bank of Canada carefully adjusts its monetary policy to control inflation, some segments of the housing market have stalled. The latest data from Statistics Canada shows an inflation rate of 2.9% in May, up from 2.7% in April. However, when shelter costs are removed, the inflation rate drops to 1.5%.
Elevated borrowing costs are also hampering new home construction. Builders face difficulties financing new projects, exacerbating the housing shortage as Canada’s population continues to grow. The Canada Mortgage and Housing Corporation reported an increase in national housing starts in May, but the rate of new construction remains insufficient to meet demand.
Soper emphasized the need for gradual interest rate reductions to unlock housing supply and stimulate the market. “Lower rates would not only empower buyers but also incentivize builders, who rely on borrowing for development,” he said. “This is crucial to meet the diverse needs of our growing population. Without a significant supply boost, prices will continue to rise, impacting both those who seek home ownership and the one-third of Canadians in rental markets.”
Forecasts suggest that the aggregate price of a home in Canada will increase by 9.0% in the fourth quarter of 2024 compared to the same period last year. The Greater Toronto Area (GTA) is expected to see the greatest price appreciation, with a forecasted increase of 10.0% in the fourth quarter.
In the GTA, the aggregate price of a home rose 0.9% year over year to $1,190,600 in the second quarter. However, sales activity was unseasonably low, with new and active listings at their highest levels in over a decade. This increase in inventory may benefit buyers when they re-enter the market, potentially spurred by further interest rate cuts.
As the Canadian housing market navigates these complex challenges, the key question remains: How will policymakers and industry stakeholders balance the need for affordability with the imperative to stimulate market activity and housing supply? The path forward requires innovative solutions to ensure Canadians have access to stable and affordable housing options.
U.S. Inflation Eases in June: Good News for Canadian Mortgage Shoppers
Today, U.S. financial markets received a significant boost as inflation readings for June came in lower than expected, marking the lowest level since May 2020. This development has broader implications, particularly for Canadian mortgage shoppers.
In June, headline inflation in the U.S. fell by 0.1% month-over-month, following a flat reading in May, defying expectations of a 0.1% monthly gain. Core inflation, which excludes the more volatile food and energy prices, also showed a slower increase, rising just 0.1% compared to May’s 0.16% gain.
On an annual basis, both headline and core inflation figures were lower than anticipated, coming in at 3% and 3.3%, respectively. Economists from ING noted that this softer-than-expected inflation report is likely to boost the confidence of individual Federal Open Market Committee (FOMC) members, supporting the view that inflation is on its way to the Federal Reserve’s 2% target.
One of the notable aspects of the report was the slowdown in housing inflation. Shelter costs increased by 0.2% month-over-month, down from the previous trend of 0.4%. Apart from a rebound in auto insurance costs, other components of the inflation index remained subdued.
For Canadian mortgage borrowers, these U.S. inflation trends are particularly relevant. Lower inflation in the U.S. can lead to lower interest rates, which could, in turn, benefit mortgage rates in Canada. Bruno Valko, VP of national sales for RMG, emphasized the critical link between U.S. inflation data and Canadian mortgage interest rates. This is because the U.S. 10-year Treasury yield closely influences Canada’s 5-year Government of Canada bond yield, which is a key determinant of fixed mortgage rates in Canada.
Following the release of the U.S. inflation report, Canada’s 5-year bond yield dropped sharply, continuing its recent downward trend. This decline has prompted some mortgage lenders in Canada to lower their rates, offering potential relief to Canadian homeowners and buyers.
Moreover, the Bank of Canada is closely monitoring developments south of the border as it approaches its rate decision on July 24. The prospect of a rate cut by the Federal Reserve has gained traction following the latest inflation report. Analysts suggest that a September rate cut by the Fed is now more likely.
BMO’s Scott Anderson noted, “This better-than-expected inflation reading opens the door wide open for a September rate cut from the Fed.” He added that the report convincingly indicates that consumer inflation has resumed its downward path after an unexpected surge in the first quarter, potentially setting the stage for a sustainable 2% inflation rate.
RBC economists Abbey Xu and Claire Fan pointed out that the latest U.S. employment figures, which showed weakening labor market conditions, complement the inflation data. They believe that while a rate cut at the Fed’s next meeting in July is unlikely, the odds are increasingly in favor of a September cut.
As Canadian mortgage shoppers keep an eye on these developments, the key question remains: How will these economic indicators shape the future of interest rates and affordability in the housing market? Will potential rate cuts provide the much-needed relief for homebuyers, or will other economic factors come into play? The evolving landscape of inflation and interest rates will undoubtedly influence the decisions of homeowners and prospective buyers in the months to come.
-The TanTeam Editorial
