Canadian mortgage borrowers are finding out fast that Toronto real estate isn’t always a path to riches. Equifax data shows Toronto mortgage delinquencies climbed in Q1 2024, and now sit at the highest rate in 8 years. Except back then the rate was falling as the market improved, and it’s heading in the wrong direction now. As investors try to unload into the weakest demand balance on record, the rate is likely to continue rising in the near term.
Toronto Mortgage Delinquencies Double, Highest Rate Since 2016
Toronto mortgage delinquencies are climbing at a very rapid rate, as investors flee. The rate climbed 0.02 points to 0.14% in Q1 2024, representing a 0.07 point increase since last year. Over the past year the rate has doubled, hitting the highest level since 2016.
Toronto Mortgage Delinquencies Hit Highest Level Since 2016
The delinquency rate for mortgaged properties in Toronto CMA, as reported to Equifax.
Source: Equifax; CMHC; Better Dwelling.
Toronto’s Borrowing Surge Means A Lot More Bad Mortgages
Trying to understand what this means? The interpretation depends on who’s looking at the data and for what purpose. From the perspective of a bank, delinquencies are heading in the wrong direction but they remain a relatively small share of total loans. Since it’s a rate, more people can default as long as they write new loans at a much faster rate. This loss is simply the cost of doing business.
Those concerned with the social impact may be a little more concerned. The rate isn’t just climbing, but so is loan volume. From Q1 2019, Toronto mortgage debt reported to equifax climbed 41.4% higher to $421.6 billion by the end of 2023. If all mortgages were the same size over that period, a 0.15% delinquency rate in Q1 2024 would include 41% more households than the same rate in 2019. It may not be much from a cost perspective, but it does mean a sharp increase in social liabilities.
Toronto Mortgage Deliquencies Rise As Fewer People Rush To Buy
Mortgage delinquencies are generally misunderstood and commonly believed to indicate affordability. Not exactly—affordability erodes much more sharply while prices are rising. There are still a lot of people who can’t handle their mortgage during a hot market, but it’s much easier to sell. If a home sells within days of listing, a distressed owner can sell and walk away with a profit instead of a delinquency.
Delinquencies only rise when borrowers are unable to dispose of the asset. Toronto’s recent slowdown and inventory surge as investors exit, has left the region with one of the worst demand balances on record. Predictably, delinquencies are climbing as liquidity dries up.
Canadian mortgage data is locked down so it’s hard to determine which borrowers are having trouble. However, an analysis of US housing bubble data shows investors are the most likely to default on their loan. Researchers found investors defaulted at a much higher rate, while low income subprime borrowers largely continued to pay their mortgage.
This makes sense since a low income household still needs a place to live, and a mortgage is the last bill an end user defaults on. Lenders also provide more assistance and tools for families than investors, helping them mitigate their debt issues more easily than investors.
Considering the recent marketplace in Toronto, this would make a lot of sense. Investors captured a significant share of the housing market, displacing first-time buyers. Most using a mortgage are now taking possession of new units that have negative cash flow, meaning they need to top up rents to cover the mortgage payments on the unit. Combined with slow sales and rising rental vacancies, liquidity is drying up while pressure is rising.
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