We’ve been writing about mortgages for years and have never seen the mortgage growth we’ve seen in 2021. And Equifax's data agrees.
The firm reported earlier this month that new mortgages were up 41.2% in the first quarter compared to Q1 2020.
The average balance of new mortgages also hit a record high: $326,930, per Equifax data.
Record mortgage volume and mortgage amounts are great if you’re selling mortgages, but they have some undesirable side effects. Here are four:
1) Record indebtedness
Too many people are panic-buying and getting in over their heads. We know this because Bank of Canada data confirms a record number of mortgages now have loan-to-income ratios that exceed regulators’ threshold for “highly indebted.” To the extent these people have less than 20% equity, that’s "associated with a greater risk of falling behind on debt payments,” the Bank says.
Housing affordability is 19% worse than the long-term average, according to RBC. And when it comes to single-family homes, we’re getting closer and closer to the 1990 peak in housing un-affordability. That means people will be paying a much higher percentage of their income to their lender than normal, for a long time to come.
2) More Waiting
High volumes mean longer wait times for approvals, especially at lenders with the lowest rates. People see their leading rates on sites like this and bombard them with applications. Some lenders are still quoting wait times over two weeks, just to look at your application and decide if they’ll approve you! And we don’t see this subsiding until further into the summer. Needless to say, always consider your lender’s turnaround time if you have a financing condition in your purchase agreement.
Rates are based on a home value of $400,000
3) More risk of negative equity
Home prices are up 38.4% nationwide (on average) in just 12 months. Some believe it may be time for the market to take a breather.
If prices were to correct 10% next year, for example, that puts a new borrower making the minimum down payment underwater. In fact, they’d owe roughly 6.3% more than their home is worth in that scenario.
If they tried to sell and got their asking price (doubtful in a falling market), they’d be left with almost 11% less than they owe on their mortgage. If they didn’t have other resources to pay that difference, they couldn’t sell. It’s that simple. They’d be stuck in a home they don’t want.
Now, Canada hasn’t seen this play out on a national basis in decades. Prices usually bounce back quickly from sell-offs. But if rates rise, the economy slows, prices stay overstretched and immigration doesn’t come to the rescue, a meaningful percentage of underwater borrowers is within the realm of possibility.
4) Less Rate Competition
This may be the least of the worries, but it’s a fact. When banks are flush with mortgage applications, they don’t have to discount as much. And that’s exactly what we’re seeing. The best big-bank 5-year fixed rates (discretionary uninsured rates) have been stuck around 2.14% for weeks. Lenders don't need to compete on rates when volumes are high.
And now we’re seeing bond yields inch higher. That’s due to the U.S. Federal Reserve forecasting earlier rate hikes than previously anticipated. This only serves to prop rates up further.
Economist types might argue that robust mortgage activity is a good thing. After all, take away housing growth and there’s not much to crow about in Canada’s economy besides strength in the resource sector. But Canadians are paying a price for a hot mortgage market, and it’s a toll many will continue paying for years.
