Canada’s largest real estate market is turning into a headache for the country’s largest bank. Yesterday we mentioned RBC’s Greater Toronto Area (GTA) mortgage portfolio has seen serious mortgage delinquencies (90+ days) soar in Q3 2024. We received a few requests for a deeper dive, so here it is. Toronto real estate may seem boring these days, but cracks are very quickly starting to appear in its foundations. Home prices in the region have barely budged in response, causing many to dismiss the issue. However, the fact that sellers are falling into delinquency instead of lowering prices reveals a much more disturbing trend.
Greater Toronto Mortgage Delinquencies Are Soaring At RBC
RBC is starting to experience some turbulence in the country’s largest market. The serious delinquency rate climbed to 0.27% for its GTA portfolio in Q3 2024. This represents a whopping 42% increase from the previous quarter, now 170% higher than last year. Slightly higher than the national average for the bank, and higher than anything seen going back to the 2017 mini-foreign buyer bubble. It’s the speed at which this breakdown is occurring that’s a more pressing concern.
Greater Toronto Real Estate Sees Mortgage Delinquencies Soar
The Greater Toronto mortgage delinquencies at RBC, in percentage points.
Source: RBC; Better Dwelling.
Looking at the above chart, one doesn’t have to be an expert to see that something isn’t right. The bank’s GTA portfolio saw the delinquency rate climb 575% over the past two years. Considering how much borrowing occurred since 2020, that’s also a lot more mortgages in absolute values than pre-2020.
Previous Market Issues Were Delayed, Amplifying Consequences
Government tools to mitigate delinquencies during a period of high scrutiny are partially behind the move. Artificially lowering the delinquency rate through temporary state-endorsed resources doesn’t eliminate the issue. It only delays the problem, eventually amplifying the negative consequences. Intervention may kick the can down the road, but it’ll still be there with more cans later. Rather than having the issue spread out, it will amplify the problem for others who could have escaped with fewer consequences.
It’s important to remember that mortgage delinquencies are primarily a liquidity issue. People try to sell before defaulting and only default after failing to do so. The delayed cohort isn’t fixed but gets distributed with the rest of the natural cohort. Sellers trying to exit before they’re distressed now have to compete with seriously delinquent ones, amplifying competition and the number of people who can’t exit gracefully.
Toronto real estate prices haven’t moved much in response, showing how many problems are piling up. There’s always a buyer for a property, but falling into delinquency first means the price was out of reach for anyone to realistically consider. The fact that prices haven’t made a significant decline indicates most of these mortgages are likely recent buyers (most likely investors), who have seen their equity wiped out and would need to pay to sell at a lower price.
Most expect Canada to engage in a demand inducement scheme to create capital cushioning. A demand inducement scheme is a form of stimulus to create more buyers by letting them access more credit so they can come up in price rather than sellers lowering price. Capital cushioning is where demand is created, knowing it won’t last forever, but transfers the risk from a group of high-risk borrowers to lower-risk ones.
The US used this strategy during the Great Recession, explaining that investors are more likely to default since they have shorter timelines and less motivation than end users. However, an end-user will struggle to avoid defaulting on their shelter, and have a longer period to ride out negative equity if need be. Horrible, but at least the blunt explanation is better than just calling it their boldest mortgage reforms ever to help affordability.
In any case, it’s the same issue as mortgage delinquencies. Delaying is the easy part. Dealing with the amplified consequences that compound the longer it occurs is where it becomes an issue. First a little, then all at once.
Most of the market’s previous issues were never eliminated but just delayed. Multiple times. It’s what people expect now, a textbook example of moral hazard. Several issues are coming to a head, and policymakers are likely to try and delay the problem again. The delay isn’t risk-free though, it applies more stress to households and requires bigger corrections to restore efficiency. It’s a strategy that works… until it doesn’t. It’s unclear if that day is soon, but no one wants to see what it looks like when an economy is so broken that even tens of billions in stimulus can’t fix it.
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