The Canadian housing market has been fueled by the surge in home sales and increased refinancing activity. Based on recent Equifax data, new mortgage volumes were up 41% year-over-year in the first quarter, and the total value was 70% higher. That followed a very strong Q4. Average new mortgage values were 20% higher than the same time last year, reflecting the strong rise in home prices.
While the recent regulatory change to high-ratio mortgages is a step in the right direction, we doubt that it will have a notable impact on overall activity given the falling share of insured mortgages in originations. In fact, over the past year, the vast majority of growth in mortgages outstanding came from the uninsured segment of the market.
So, despite rapidly rising home prices, more and more homebuyers are able to come up with the necessary 20% (or more) down payment and qualify for a conventional mortgage.
How the COVID-19 pandemic affected the Canadian housing market
Another interesting development during the COVID-19 pandemic was the change in composition of the supply of mortgages, with alternative lenders (private lenders and mortgage investment corporations (MICs) losing market share to banks.
We suspect that the vast majority of the underperformance of alternative lenders is due to the exit of small and less capitalized players since the beginning of the crisis.
First-time homebuyers rush to low mortgage interest rates
There is little doubt that low interest rates were the motivator for the housing surge. First-time homebuyers led the housing recovery in 2020, but existing homeowners became an important source of activity in Q1 of 2021, according to Equifax data.
While the average mortgage size rose by almost 19% for first-time homebuyers in Q1, monthly payments were up only 3.7%. Affordability has remained consistent despite the rapid increase in prices.
Longer term, however, there are concerns that the rise in mortgage values in lower-income areas could be a challenge as mortgage interest rates rise.
One indication of the increased urgency to get into the market while interest rates are low is an increase in “gifting”. In some cases, first-time homebuyers improved their down payments through cash gifts from family or by leveraging a guarantor.
Equifax was able to connect parents with adult children to identify their credit behavior when the child bought their first home. The analysis shows that more parents used their personal credit to support their children buying their first homes in 2020.
The analysis considered increased balances on lines of credit or new personal loans of $50,000+. The share of homebuyers across the country who received support rose from 4.7% in 2019 to 5.5% in 2020. Increases were most noteworthy in regions that had relatively soft housing markets in 2019 but reported recent price gains including Calgary, Vancouver, Ottawa and Winnipeg.
The market has been driven by low mortgage interest rates and lifestyle changes during COVID-19—not house flippers. As a result, three key trends were evident:
- gains in previously weak markets fueled by low mortgage interest rates
- a sharp rise in markets farther from downtown cores
- a rally in cottage properties
The Bank of Canada will be the key market force
The fact that low interest rates and excess savings have fueled the Canadian housing market is good news near term, but there are concerns as the Bank of Canada changes its stance.
Despite relatively small rate increases in 2017/2018, data at that time showed immediate impacts on consumers. The percentage of people paying their credit card in full each month dropped sharply at the time, a strong sign of cash flow constraints.
This was especially true for those with large home equity lines of credit —typically with variable interest rates— as they had to cover larger monthly payments when rates rose. That drove higher bankruptcies and delinquencies for older borrowers.
With signs of cooling appearing this spring in the Canadian housing market, attention will quickly shift to the impact on prices.
Suburban markets that surged in the past year, and properties in cottage country, are likely to be the first to pause. The real impact will become evident if mortgage interest rates rise in 2022.
To the extent the Bank of Canada starts hiking rates in mid-2022 as we expect, the tightening trajectory is likely to be gradual enough to allow the housing market to adjust at a healthy pace. Accordingly, delinquency and bankruptcies rates are expected to return to pre-COVID-19 levels by early 2022.
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This information was originally published for Equifax Canada in collaboration with CIBC.