21st June 2024

Better business. Better community

Business Industry and Financial

Homeowners Turn to Savings as Financial Pressure Mounts

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(Visual: Government of Canada logo, and CMHC logo fade in together. A series of images featuring housing construction across Canada.)

 (Visual: Two people are shown in conversation. They sit across from one another at a boardroom table. The two individuals are Joelle Hamilton, Communications & Marketing, CMHC, and Economist Tania Bourassa-Ochoa, Deputy Chief Economist CMHC.)

0:00:06

JOELLE HAMILTON: Hello, everyone, and welcome back. CMHC just released its Residential Mortgage Industry Report, or what we like to call the RMIR, and we publish this report twice a year because it gives us a clear picture of what’s happening with residential mortgages, and it also shows how economic conditions are impacting Canadian households. Joelle Hamilton here. Today I’m joined by Tania Bourassa-Ochoa, a Deputy Chief Economist here at CMHC. Welcome back, Tania.

0:00:35

TANIA BOURASSA-OCHOA: Thank you so much for having me.

0:00:37

JOELLE: Well, thank you for saying yes to being our guest again. So, you were here about six months ago to talk about the fall 2023 RMIR, and I’m very excited that you’re here with us again today because I’m curious to know what’s changed in the last six months. But I think a great place to start is just for you to tell me and our viewers a little bit more about yourself.

0:00:59

TANIA: Sure! So, I actually joined CMHC over ten years ago, and I started as a Market Analyst for Montréal and Trois-Rivières. And a few years after that, I got an amazing opportunity to work on this huge project around data gaps. And so, what we did during those years was really collecting new data, making data available, everything around housing finance. And so, what’s really nice is that the Residential Mortgage Industry Report is really the culmination of all of those data initiatives and we’re really able to tell that story, basically, through that report.

0:01:42

JOELLE: So, when you were last here, household debt and delinquencies were creeping up due to strong and rapid interest rate growth, and you also mentioned overall mortgage growth was slowing drastically. What’s changed in the last six months, and what does this say about the broader economic climate and consumer confidence in Canada?

0:02:05

TANIA: Yeah. So, since last fall, I mean, in the context of still very high interest rates, in the context of uncertainty and, you know, quite slow growth in terms of economy, we’re also seeing that consumer sentiment is actually very low, especially homeowner sentiment. So, with all of these factors at play, mortgage growth has been slowing down quite significantly, but that’s not to say that debt has slowed down. So, it’s really the growth that has slowed down.

And when we’re looking into the activity of what’s going on in the mortgage market, well, it’s really driven by two things. On one hand, renewals. So, we talked, last time, about all of these homeowners that were, you know, approaching that time of renewal. So, we’ve seen a lot of those, but also a lot of refinancing. So, in the context of high interest rates, in the context of high inflation, one of the main reasons for refinancing has actually become debt consolidation. And that is also something that we’ve seen in the Mortgage Consumer Survey.

I would say another interesting finding from the report, this year, is the fact that switches have dropped significantly. And by switches, we mean borrowers that are switching bank or financial institution once their mortgage is up for renewal. And so, this is telling us, really, two things. On one hand, borrowers are maybe concerned about their ability to qualify with another lender because once you switch to another lender, you have to go through the stress test again, you have to requalify under the new parameters, the new interest rates, which is not the case when you renew with that same lender. So, quite an interesting finding.

0:04:01

JOELLE: And I think that’s consistent with what we saw in the Mortgage Consumer Survey, too. I mean, we’ll have to fact-check this, but I think it said something like 72% of borrowers are staying loyal to their lenders.

0:04:13

TANIA: Which is consistent with what we’re seeing, as well.

0:04:16

JOELLE: So, with 1.5 million mortgage holders set to renew in 2024 and 2025, mortgage renewals are still a very hot topic. How many mortgage consumers renewed their mortgages in the second half of 2023?

0:04:33

TANIA: Well, actually, in 2023, we saw a little over 1 million mortgages that were up for renewal and that were renewed. Obviously, with higher rates, that could, you know, come up to approximately a 30% to 40% increase on those monthly payments. But what we’ve seen — and we talked about this last time — but we’re seeing this again: Canadians are, you know, using different strategies to try to make those monthly payments a little bit smaller, with those interest rates. So, really trying to offset that.

And so, one of the things we’re seeing is, you know, choosing longer amortization periods. So, they’re really paying a little bit less in the short term, which is better cashflow-wise, but in the long run, we’re just paying more interest and we’re paying it for longer. And the other thing that we are seeing is that the popular choice, in 2023, was fixed rates between three to four, under five years. So really, what it’s telling us is borrowers are not willing to commit to a fixed rate for a five-year period, for a longer period, and there’s really this expectation that interest rates will come down sometime soon.

0:05:52

JOELLE: OK. I was going to ask you. I’m renewing in 2026 and I was going to ask you for some strategies, but you mentioned it. Like, the shorter-term mortgages, longer amortization period and all that. But I’m still hoping interest rates will come down, as many, as the 1.5 million other mortgage holders who are going to be renewing.

In the fall report, we saw a rise in delinquency for credit products like credit cards and auto loans, which was really showing us that Canadians were struggling to make their debt payments, and you’d also mentioned that that included their mortgage payments as well. Are Canadians still struggling? Are we continuing to see an uptick in mortgage delinquency rates? And if so, what’s driving it and how significant is the change compared to last year?

0:06:42

TANIA: So, actually, last fall, we didn’t quite see the mortgages in arrears start to increase. We’re actually seeing it right now. We had seen for some time delinquency rates increase for credit cards, auto loans and lines of credit, like you mentioned. That said, now, we’re seeing, you know, that kind of transposing into mortgages in arrears. But mortgages in arrears is just a part of the picture.

So, actually, the share of arrears is really what we like to call a lagged indicator. So, what I mean by that is… Well, on one hand, that means that the household has been delinquent for over 90 days or more. And most probably, they’ve been feeling that pressure of financial stress for quite some time.

So, you know, there’s different stages of financial pressure. You know, once at the very beginning, the household could, you know, start limiting their consumption. You know, drop the savings as well. You know, if that stress is persistent, then, it could impact… You know, a household could start digging into their savings, for example. They could start trying to get more debt to cover some of those debt payments. And you know, at some later stage, that’s where the household could potentially, you know, be delinquent on their mortgage, go into arrears, and that is really putting the household at a higher risk of default.

0:08:15

JOELLE: In our latest report, we’re seeing that delinquency rates for alternative lenders are higher than those with traditional lenders. Can you explain, like, maybe the risk associated with alternative lenders, and show how their share impacts the overall financial stability of our housing market?

0:08:37

TANIA: Yeah, absolutely. So, alternative lenders… So, they are mortgage investment corporations, typically called MICs. You know, you have some large private lenders in there as well. They are unregulated lenders, when it comes to lending a loan, and what characterizes them is that they are… they are typically going to offer, you know, distinct mortgage products, and they are also going to underwrite their mortgages in a different way than a bank would. They typically provide short-term loans to clients that are either… you know, have either bad or don’t have credit history at all. You know, their clients could be someone that is, you know, facing one of life’s not-so-fun events like, you know, health issues or a divorce, separation. But the clients also include self-employed.

So, ultimately, these borrowers tend to be… or to have a riskier profile. So, it’s not… We’re not concerned or we’re not surprised by the fact that the arrears rate in that segment is higher. However, the arrears rate in the alternative lending space has been increasing for a much longer period of time. So, for like, maybe over a year. And it’s also been increasing rapidly. So, it’s going to be interesting to see if that kind of translates into the rest of the industry.

0:10:10

JOELLE: So, we’ve been talking a lot about Canadians who were able to build up a substantial nest egg or savings during the pandemic. But now, those savings seem to have been depleted, maybe even exhausted, for some Canadian households. What are some indicators that have been showing this?

0:10:32

TANIA: So, you’re absolutely correct and we’ve actually been looking at a suite of indicators to kind of pre-emptively see if households are facing or experiencing that financial pressure. As I mentioned, mortgages in arrears is a lagged indicator. So, that’s really going to happen at the end. And so, one of the things that we’re seeing is… Yes. So, through credit data, basically, we’re seeing that for some Canadians, that financial buffer that was accumulated during the pandemic, you know, when we had all of these mortgage deferral programs, we had government income support… Incomes were, you know, growing quite steadily, the labour market was good. And so, Canadians were able to kind of accumulate that financial buffer. For many, however, this financial buffer has been exhausted.

When we’re looking at the savings, the share of savings of Canadian households, we see that that has declined. It’s overall at 6%, but when you look at lower- to mid-income households, we’re seeing that they’re actually dissaving. So, that means that they are really digging into their savings and making use of that money to be able to cover some of the other expenses, and maybe even debts.

Other indicators are showing us or telling us or suggesting in some way that consumers are, you know, getting more debt and using debt to pay other debt. So, those kinds of financial behaviours are also suggesting that financial pressure. You know, you’ve probably talked about this, last time around the Mortgage Consumer Survey, but one out of four Canadians is saying that they’re concerned about their ability to make their mortgage payment on time. So, it’s really, really showcasing that stress.

I was even trying to look into alternative indicators. So, what are other maybe-not-so-clear indicators? But one of them is food security. So, Statistics Canada has a survey around food security, and the recent results that came out were showing that one out of four Canadian households was facing food insecurity. So, what that means is they either have to cut on quality or quantity of food, or both, to make ends meet at the end of the day. So, you know, the aggregation of all of these indicators together is really showing us that Canadians are in this more fragile situation, economically speaking, and yeah, that the pressure is definitely there.

0:13:21

JOELLE: And I’m like… Should I ask this question? I’m just going to ask it. Is the worst yet to come?

0:13:28

TANIA: Well, you know, we are definitely expecting mortgages in arrears to continue on that upward trend, you know, with all of those factors at play. You know, the labour market has softened a little bit. So, we’ve seen unemployment rates increase a little bit. And you know, the main driver of mortgage arrears is unemployment. So, when a job is lost, it will, you know… very likely to, you know, show up in mortgages in arrears. However, we do expect that increase in arrears to be limited. So, we’re expecting 2025 to kind of turn around. We’re expecting an economic momentum that’s going to translate into consumer confidence. It’s going to translate into the economy and to more employment. So, that’s going to help limit, you know, that increase.

And also, the fact that we’re expecting home prices to continue to be quite sustained. So, you know, you’ve talked to my colleagues. There’s clearly this major supply issue. And so, the lack of supply will kind of be able to sustain those prices. So, for a household that is, you know, living… has persistently been living under financial stress, is struggling to find a solution, you know, the liquidity of the housing market could be a solution because there is the possibility to sell the property, you know, on the market in a reasonably short amount of time.

0:15:05

JOELLE: Do you have any other potential strategies or, like, measures that can be taken to mitigate these, like… this risk or this struggle that Canadians are facing?

0:15:16

TANIA: You know, I want to say that ultimately, we’ve been talking a lot about numbers today, but what hides behind those numbers is people and families that are really, you know, living with that financial stress, and that also translates into emotional pressure. So, I just want to say that there may be some solutions out there. There’s always the possibility to, you know, talk with a credit counsellor. You know, if you look on our webpage with the article that will… that just came out, you’ll find some links, you know, and maybe someone can help you find solutions that are really, maybe, more suitable for you.

0:15:59

JOELLE: Well, that’s a wrap on our episode today. Thank you, Tania, for joining us. You’ve given us a lot to think about and I, for one, am looking forward to you coming back in the next six months so we can see how mortgage trends have shifted and evolved.

0:16:13

TANIA: Thank you so much. I’m looking forward to being back.

0:16:15

JOELLE: And thank you to our listeners, today. If you’re looking for a link to CMHC’s full Residential Mortgage Industry Report, take a look at the description below. And also, let us know what you thought of this podcast by leaving a comment. And don’t forget to subscribe to our YouTube channel for more conversations that matter, here on our podcast. Until next time.

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(Visual: The Government of Canada logo and the CMHC logo appear together. All text and logos fade to white.)

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