Mortgage Update: OSFI's Perspective on Key Mortgage Risks and Alternative Insights
The Office of the Superintendent of Financial Institutions (OSFI) has recently published its Annual Risk Outlook for 2024, which included some noteworthy insights.OSFI projects that by the end of 2026, 76% of the existing mortgage loans as of February 2024 will come up for renewal. This high volume of renewals poses a significant risk to Canadian homeowners, especially those who secured mortgages at lower interest rates during the period from 2020 to 2022.Homeowners renewing their mortgages in the next few years could face a substantial increase in their monthly payments. This “payment shock” arises as they transition from historically low rates to potentially higher current rates, which could strain household finances.Households that are highly leveraged and have borrowed a significant portion of their home’s value will feel the brunt of these rising costs more severely. This is particularly true for those with variable-rate mortgages that have fixed payments, where the interest portion of their payment may increase significantly.As these borrowers adjust to higher rates, there is an anticipated rise in the number of residential mortgage loans entering arrears or default, as some homeowners may struggle to keep up with increased payments.OSFI’s forecast aligns closely with the Canada Mortgage and Housing Corporation’s (CMHC) estimates, which also indicate that approximately 70% of outstanding mortgages are expected to come up for renewal between 2024 and 2026. Some of the mortgage renewals will involve short-term loans lasting one to two years, which means these borrowers have already experienced payment increases during the current cycle of interest rate hikes. However, according to an Edge Realty Analytics May 2024 report, nearly 60% of borrowers have yet to see their payments reset during this cycle.OSFI’s Annual Risk Outlook also reveals that mortgages which have already undergone payment increases due to renewal or specific product types, such as adjustable-rate mortgages, are exhibiting higher rates of non-performance, or the frequency or proportion of mortgage loans that are not meeting their contractual obligations. If residential real estate markets weaken, this trend could escalate into increased defaults, lowered recovery rates, and consequently, higher credit losses for financial institutions.Variable-rate mortgages with fixed payments constitute approximately 15% of Canada’s outstanding residential mortgages. Should mortgage rates stay high, borrowers may face significant financial strain in meeting their contractual amortization obligations, and struggle to make necessary lump sum payments or increased mortgage payments.Static payment variable rate loans appear particularly vulnerable. Median payments for these loans are projected to reset 50% to 60% higher in 2025 and 2026.However, the Edge Realty Analytics report challenges OSFI’s estimate that mortgages with variable rates and fixed payments represent only 15% of all outstanding mortgages. To provide a clearer picture, the report draws on various data sources and industry insights:The Bank of Canada publishes detailed data on mortgage loan balances categorized by product type. According to their figures, variable-rate mortgages account for 28% of all outstanding mortgages, which is significantly higher than OSFI’s 15% estimate for variable-rate mortgages with fixed payments.The two primary chartered banks providing floating payment variable rate loans are the Bank of Nova Scotia (BNS) and the National Bank of Canada. Together, these banks represent just over 20% of the domestic mortgage loans issued by chartered banks.The remaining major banks predominantly offer static payment variable rate loans. When considering the total market, these banks account for approximately 23% of the variable rate mortgage market share. This discrepancy suggests that the proportion of static payment products is higher than OSFI’s estimate.While some households might choose mortgages with floating payments (where monthly payments vary with interest rate changes), discussions with mortgage professionals indicate that this is a very small segment. The demand for floating payment products is minimal, and insufficient to explain the difference in OSFI’s lower market share estimate of 15%.Based on these insights, Edge Realty Analytics proposes a revised breakdown of the mortgage market:Fixed 5-Year Mortgages: 37%Fixed 3 to 4-Year Mortgages: 24%Variable-Rate Mortgages with Fixed Payments: 22%Fixed 1 to 2-Year Mortgages: 11%Variable-Rate Mortgages with Floating Payments: 6%OSFI’s Annual Risk Outlook also notably highlights ongoing concerns in corporate credit and commercial real estate, with particular focus on the construction and development and office sectors. These areas remain under stress and face significant uncertainty. Despite the availability of market-based and core funding liquidity, past economic downturns and stress events have shown that such conditions can rapidly deteriorate.The construction and development sector, in particular, is struggling due to high interest rates and issues with affordability. Since 2020, banks have substantially increased their loans to construction and development projects, amplifying their exposure to potential risks in these markets.
The latest economic update for the week of June 18-23, 2024
Here is the latest economic update for the week of June 18-23, 2024, including key economic facts and a focus on Toronto, Ontario, and Canada, with an emphasis on real estate. US Economic Indicators: US 10Y Treasury Yield: 4.43% 🔼 10YT Minus 2YT Spread: -0.46% 🔻 US 30-Year Fixed-Rate: 6.85% ━ US Prime Rate: 8.50% ━ SOFR: 5.33% ━ US Inflation: 3.3% ━ USD/CAD Exchange Rate: $1USD = $1.36CAD 🔻 S&P 500: $5,473.17 🔼 Gold: $2,368 🔼 Lumber: $493 🔻 Crude: $74.53 🔻 Gasoline USD/Gal: $2.36 🔻 Global Container Freight Index: $3,487 🔼 Bitcoin: $70,976 🔼 Ethereum: $3,857 🔼 Luxury Watch Index: $33,209 🔻 Canada GDP Growth: The GDP growth for Q1 2024 was 1%, with the Bank of Canada maintaining a cautious outlook for potential rate cuts later this year (FinViz). Inflation: Projected to stay around 3% in Q2 2024 and ease below 2.5% in the latter half of the year (Bank of Canada). Interest Rates: The policy interest rate was reduced by 25 basis points to 4.75% (Bank of Canada). Employment: The national unemployment rate stands at 6.7%, a slight decrease from the previous month (Job Bank). Canada Prime Rate: 6.95% 🔻 Ontario Unemployment and Job Market: The unemployment rate in Ontario is 6.7%. Employment trends vary by sector: Manufacturing: Employment decreased by 1.7%. Transportation and Warehousing: Employment dropped by 4.1%. Healthcare and Social Assistance: Employment increased by 2.4%, driven by new healthcare facilities and provincial investments (Job Bank). Toronto Employment: The Toronto economic region saw a 1.8% increase in employment year-over-year, adding 66,900 jobs from May 2023 to May 2024. However, the unemployment rate rose to 7.9%, up 2.1 percentage points from the previous year (Job Bank). Real Estate and Construction: Toronto's real estate sector remains robust with ongoing construction projects and new housing developments. The recent interest rate cut by the Bank of Canada is expected to positively influence mortgage rates and the housing market (FinViz). Real Estate Market Insights Toronto: Housing Market: The real estate market in Toronto continues to grow, supported by significant developments and new housing projects. The rate cut by the Bank of Canada is anticipated to lower mortgage rates, making housing more accessible (Bank of Canada) (FinViz). Commercial and Investment: Toronto remains a prime location for commercial and investment properties, with ongoing urban development and infrastructural improvements. Ontario: Regional Variations: While Toronto experiences high unemployment, regions like Stratford–Bruce Peninsula have significantly lower rates. Employment in sectors like healthcare is increasing, indicating a strong demand for specialized services (Job Bank). Summary The economic indicators for the week of June 18-23, 2024, reflect a dynamic landscape with mixed trends across different sectors. While the US economy shows stable growth and controlled inflation, Canada's focus on reducing interest rates aims to support economic stability. Toronto's real estate market remains strong, bolstered by ongoing construction and housing developments.
May Canadian home sales drop slightly as new listings increase: Is a market revival coming?
National home sales in Canada edged down 0.6 per cent month-over-month last month, with actual monthly activity coming in 5.9 per cent below May 2023 levels. On the other hand, sales activity remained below the 10-year average, as the number of newly listed properties increased by 0.5 per cent month-over-month in May. More homes for sale across Canada thanks to new listings and slow sales More new listings amid slower sales have led to an increasing number of homes for sale across most Canadian markets. About 175,000 properties were listed for sale nationally at the end of May 2024, representing a 28.4 per cent increase from a year earlier, but remaining below historical averages. There were 4.4 months of inventory nationally, up from 4.2 months in April, the highest level for this measure since the fall of 2019. The MLS Home Price Index dipped 0.2 per cent month-over-month in May. The non-seasonally adjusted national average sale price was down 4.0 per cent year-over-year at $699,117. Largely flat prices with a few anomalies Home prices are largely flat across most markets, except for steady increases in Calgary, Edmonton and Saskatoon. The national sales-to-new listings ratio eased to 52.8 per cent, still within the 45-65 per cent range for balanced market conditions. The non-seasonally adjusted national average sale price was down 4.0 per cent year-over-year. Lower interest rates & the psychological effect on homebuyers The Bank of Canada’s recent 25 basis point rate cut is expected to have a significant psychological effect on potential homebuyers who have been sitting on the sidelines, bringing pent-up demand back into the market. However, the pace and extent of further rate cuts will determine the impact on the housing market. Canadian housing activity saw another quiet month in May, with sales edging slightly lower and new listings moving only a little higher. We’ll see what happens in the coming months, when the Bank of Canada’s rate cut is expected to create a revival.
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