The Bank of Canada’s semi-annual Financial Systems Review was released on Thursday, and points to a few specific risks to homeowners. Below, we’ve taken a look at these risks, as well as some cautious optimism from the report.
High loan-to-income ratio mortgages are on the rise
In December’s report, it was shown that there was an increased amount of household indebtedness, and that trend is continuing. Canadians in Vancouver and Toronto are taking on increased ratios of debt-to-income in their mortgages.
A mortgage’s loan-to-income ratio (LTI) is your mortgage debt level relative to your current income. The higher the ratio, the more relative risk you are taking on, as higher future interest rates will more greatly impact someone with a high LTI mortgage.
The commonly compared LTI ratio—450%—increased from 12% of all insured mortgages originating in 2014, and 15% in 2015. This accounts for 24% of all mortgage debt that originated in 2015.
The percentage of insured mortgages with high LTI ratios is on the rise in every part of Canada, but is greatest in Toronto, Calgary, Hamilton, and Vancouver.
That said, this doesn’t reflect how homeowners are dealing with these debt levels.
“Arrears rates on mortgages have actually been going down in recent years in Ontario and BC,” says Lauren Haw, CEO of Zoocasa. “This is attributable in part to growth in the employment levels in these regions.”
Canada’s housing markets are now three pronounced divisions
2016 has thus far divided the housing markets across the country into three sections, based on average price growth:
- The price spike—BC and Ontario: A year ago, we wouldn’t have believed that these two markets could get any hotter, but they did. Toronto is up 15% over last May, and Vancouver is up a whopping 30%.
- The oil provinces—Alberta, Newfoundland and Labrador, Saskatchewan: Largely due to the downturn in oil, these three provinces are seeing a fall in housing prices, over 2% in the last year and 6% since the end of 2014.
- The rest of Canada remains a balanced market, similar to sales and price points to this time last year.
A Correction Could Cause Negative-Equity Mortgages
If there is a decrease in housing prices, it could put some mortgages in a position where the debt level is higher than the underlying value of the property.
If house prices declined by 15%, as they did in the early 1990’s in BC and Ontario, 13% of homes that currently have a mortgage would see these mortgages underwater. Approximately 60% of homes in Canada have a mortgage on them.
This isn’t all doom and gloom
The demand in the cities of Toronto and Vancouver remains high, due to limited supply of homes to purchase. This promotes encouraging growth and sales in the surrounding GTA and GVA areas, with new developments in and around these centres.
“The factors supporting the housing demand in Vancouver and Toronto are healthy,” says Haw. “Increased migration to these areas keeps demand high, and employment gains allow homeowners to live and prosper in these cities.”
Flickr: Magnus Larsson
