Canada's Residential Mortgage Debt Climbs to $2.16 Trillion as Growth Slows to 23-Year Low: CMHC

The Canada Mortgage and Housing Corporation (CMHC) has reported that the country's total residential mortgage debt reached $2.16 trillion by February 2024. This represents a modest 3.4% increase from the previous year, marking the slowest growth rate in over two decades. Several factors, including higher mortgage costs and the uncertainty surrounding potential interest rate cuts by the Bank of Canada (BoC), have contributed to this deceleration.

Key Factors Influencing the Slowdown

Elevated Mortgage Costs and Rate Uncertainty

The CMHC report indicates that the combination of increased mortgage costs and the unpredictable future of BoC's interest rates has led to a noticeable decrease in home sales and prices during the latter half of 2023. The reluctance of potential buyers, facing higher borrowing expenses, has slowed the growth in mortgage debt significantly.

Preference for Shorter-Term Mortgages

In response to the volatile interest rate environment, many borrowers have shifted towards shorter-term, fixed-rate mortgages rather than the traditional five-year terms. This trend is driven by the expectation of potential rate cuts by the BoC, leading lenders to offer more attractive rates on shorter-term products to secure borrowers.

Future Projections and Market Outlook

Despite the current slowdown, CMHC forecasts a rebound in mortgage debt growth in the upcoming years, spurred by several factors:

• Expected Decline in Mortgage Rates: Forecasts suggest that mortgage rates will decrease, making borrowing more accessible and encouraging more home purchases.
• Population Growth: Ongoing population growth will continue to drive housing demand, increasing home sales and mortgage volumes.
• Rise in Real Disposable Incomes: An increase in disposable incomes will enhance the purchasing power of households, supporting higher investments in housing.

Potential Risks and Financial Vulnerabilities

Tania Bourassa-Ochoa, CMHC's Deputy Chief Economist, pointed out that the high debt levels and financial struggles of many households pose significant risks. As homeowners grapple with managing their monthly budgets, there is increased concern among policymakers and financial institutions about the broader economic implications. Although the national mortgage delinquency rate remains low at 0.17%, it has shown an upward trend for the first time since the pandemic, signaling potential financial distress among some borrowers.

Additional Insights

Mortgage Delinquency and Market Share

The CMHC report also noted a rise in mortgage delinquency rates in the fourth quarter of the previous year, although they remain near historic lows. The delinquency rate reached 0.17%, reflecting early signs of financial strain among homeowners. Moreover, the market share of the Big Six banks in newly extended mortgages has increased significantly, driven by refinances and renewals. These banks saw an 11.8 percentage point increase in market share from the previous year, while other chartered banks and credit unions experienced declines.

Homeowner Behavior and Mortgage Choices

Despite notable discounts on five-year, fixed-rate mortgages early this year, many borrowers continue to prefer shorter-term options. Mortgages with terms ranging from three to less than five years accounted for nearly 40% of all new lending in February 2024. Variable-rate mortgages represented 15% of new lending, reflecting ongoing uncertainty about future rate changes.

Conclusion

The slow growth in Canada's residential mortgage debt reflects the broader economic challenges and uncertainties affecting the housing market. However, with anticipated improvements in economic conditions and mortgage rates, the outlook for mortgage debt growth remains positive. Policymakers and financial institutions must continue to monitor and manage these changes to ensure stability and support growth in the housing sector.