The vast majority of Canadian homeowners are able to withstand intensifying upward pressure on interest rates, but a quarter of them could experience increased financial stress. As for the accessibility of the property …
Inflation is stubborn and preparing to move beyond central bank targets longer than expected. The Bank of Canada will provide an update on Wednesday, but we already know the trajectory that is emerging. Already, the end of the quantitative easing program decreed at the end of October is not without fueling upward pressure on longer-term interest rates. The Bank of Canada also sent out the message of a hasty hike in its key rate. The economy should not absorb its excess capacity before 2023, she said at the start of the year, and then evoke the second half of 2022. According to the current projection, this would occur in the second or third quarter of 2022, i.e. earlier than expected in July, which paves the way for the start of a hike in the key rate. Possibly from April, think the economists of the National Bank.
This trajectory being known, it remains to know the rhythm and the extent of the acceleration. Analysts believe that the Bank of Canada will show restraint despite the inflationary threat, recalling that Canada has entered a pandemic with a record level of household debt.
The growth in these liabilities accelerated during the health crisis, with household debt increasing by $ 185 billion, or 7.9%, between the fourth quarter of 2019 and the second of 2021. The push was fueled by a $ 193 billion, or 12.5%, increase in mortgage borrowing, barely dampened by the repayment of high-rate debt such as outstanding credit card balances and unsecured lines of credit.
Oxford Economics has calculated that 70% of this new mortgage debt is variable rate. Not surprisingly with the soaring real estate prices, since the interest rate differential favoring variable maturities made it possible to lower monthly mortgage payments. And this gap with the fixed rate has grown larger during the pandemic. Result of this surge: variable rate loans accounted for 25% of outstanding mortgage loans last September, against 18% in February 2020.
Looked at differently, in September, 75% of outstanding loans were at fixed rates, half of which had maturities of five years or more. According to a scenario of a gradual increase in the Bank of Canada’s target rate towards reaching its so-called neutral rate of 2% somewhere in 2026, against 0.25% currently, the renewals made by 2024 will be done at a rate lower than or equal to that which prevailed during the monetary tightening of 2018-2019, retains Oxford.
On this basis, households are, on the whole, well placed to cope with a gradual increase in the cost of money over the next few years. Also under this scenario, the ratio of interest payments to disposable income would drop from a low of 6.3% in the third quarter of 2021 to 8.2% in the last quarter of 2023, a percentage that would align with the level reached in 2018-2019. This would increase the average monthly mortgage payment by $ 86 to $ 1,468 by the end of 2023, assuming the principal remains fixed. A scenario of a faster rise in the key rate, which would bring the rate to neutral three years earlier, would double the expected increase in the monthly mortgage payment.
Poor quality of new loans
These projections by the analysis firm, however, hide a deterioration in the quality of the mortgage loan portfolio, a deterioration that makes many owner households vulnerable to a drop in income or a price correction in an overheating residential real estate market. . The share of bad quality loans would have increased from 14% in 2019 to 25% in the first quarter of 2021.
With soaring prices, loan-to-income ratios exceeding 450% reached 22% by the end of 2020. Recent data from the Bank of Canada indicates that this share exceeded 25% at the start of 2021. In addition, the proportion of new mortgages that are insured at a high loan-to-market ratio (over 95%) nearly doubled in one year to 22% in the first quarter, Oxford calculated using data from the Canadian Corporation. mortgage and housing.
As for new buyers, hyperinflation in real estate prices has added to the slowdown in the resale market and upward pressure on rates to deteriorate the affordability of home ownership. Oxford Economics reported in October that its housing affordability index had deteriorated in almost all major metropolitan areas in Canada in the second quarter, with a surge in prices outstripping income growth.
This index reached 1.35 at the Canada level, which means that house prices were 35% above the borrowing capacity calculated on the basis of median household income. It rose ten points year on year, as soaring prices more than offset low mortgage rates and rising household incomes. In Montreal, the index reached 1.04, and it should reach 1.10 in the second quarter of 2022, against 1.45 for the Canadian average.