Canada’s big banks are seeing more mortgage borrowers fall behind on payments despite relief measures. Canadian Bankers Association (CBA) data shows the serious mortgage arrears rate climbed again in October. The rate remains historically healthy, but it has increased sharply from record lows despite policymakers making extensive efforts to mitigate the erosion.
About Today’s Data
Today we’re looking at the national mortgage arrears rate from the CBA. A mortgage in arrears is one considered delinquent, so it was caught smoking behind the local high school or stealing a car. Kidding. Just making sure you’re paying attention. The CBA only includes seriously delinquent mortgages in this state, which are those at least 90 days past due.
Who is the CBA? It’s an industry organization that represents the banks. As a result, the stats only include the handful of CBA members that represent the bulk of data. The institutions included are BMO, CIBC, National Bank of Canada, RBC, Scotiabank, TD, Canadian Western Bank, Manulife, Laurentian, and Equitable (from Nov 2020).
That’s a lot of the country’s mortgages, but far from all of them, and that creates an important data skew. While this is often considered the de facto reporting of the mortgage market’s health, it only represents the mortgages at those banks. Notably absent is private lending, which has become popular across investor-heavy markets like Toronto. The data for those local jewelry store-turned-mortgage lenders also won’t be included.
Consequently, this data skews to the upside—and while the CBA likes to compare its mortgages to data from the UK and US, it’s not a fair comparison since they use more comprehensive measures. But that’s less important than the real insight—liquidity.
Most people think a rising mortgage in arrears goes hand in hand with rising poverty. Not necessarily the case, since people still go broke and lose jobs in great economies too. The difference is that they can sell their home in a booming economy before they fall behind on payments. People only tend to struggle when they can’t dispose of a property fast enough, or the value stops rising, preventing them from withdrawing more equity.
In short, it’s less a sign of affordability and consumer health as it is a sign of liquidity. Ultimately, the big takeaway is the direction of this trend, providing further insight into the qualified demand balance beyond just purchasing. After all, the ability to purchase property is one thing. The ability to sustainably carry the mortgage to purchase it is another issue.
Canada Is Seeing A Sharp Uptick In Mortgages In Arrears Despite State Interventions
The share of total mortgages at Canada’s largest banks that are at least 90 days past due.
Source: CBA; Better Dwelling.
Canada’s banks have seen a steady climb in residential mortgage borrowers falling behind. The monthly arrears rate climbed 5% (+0.01 points) to 0.21% in October. This represents an increase of 23.5% (+0.04 points) from last year.
Canadian Mortgage Arrears Rate Is Normalizing
The rate has been on a steady climb toward normalization. The arrears rate has climbed 50% (+0.07 points) from the record low last seen in September. It’s at the highest rate since April 2021, just a year after rates fell to the lowest level ever. Still not back to pre-2020 levels, but the rate is heading in the wrong direction—even with the unprecedented efforts to suppress this increase. We’ll circle back to that in a moment, but let’s first discuss what this means in terms of volume.
An arrears rate at this level is both not an issue and a very serious one, depending on who’s looking at it. From the bank’s perspective, the rate is relatively low since the losses associated with it are more than covered by the profits made from higher quality credit. Huzzah, the banks are doing fine. Really shocking, we know.
In the context of bank profits and losses, it’s a small risk. However, the CBA reported a touch over 5 million mortgages, with the 0.21% arrears rate representing 10,826 mortgages in October. For context, CREA reported 44k home sales in the same month, about 4x the volume of mortgages in arrears. Once again, small for the banks but not in the context of Canada’s real estate markets.
The normalization is even more interesting when one considers this to be happening with state intervention. Just one government agency took credit for preventing thousands of mortgages from falling into arrears recently. Had those been allowed to go into the stats, the rate would likely already be normalized. That’s without considering the other measures, such as delivering billions in taxpayer relief and redirecting state funds to suppress mortgage rates. Then there’s the worse quality credit that doesn’t report—a significant share of Canada’s mortgage market that’s often not discussed and difficult to quantify.
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