For mortgage industry members and market watchers who’ve seen how Ontario’s economy has struggled in recent years, it likely came as no surprise to hear that Toronto’s rate of mortgage arrears currently leads the country.
Canada Mortgage and Housing Corporation (CMHC) research released last week showed delinquency risk saw its “strongest and most persistent increase” in Toronto, spurred by a range of factors including higher household debt levels, a slowing housing market, and a gloomy jobs outlook.
The city’s delinquency trends still aren’t cause for panic with rates low by historical standards. But they suggest Toronto homeowners are grappling with strain that isn’t being felt elsewhere in the country, signalling sharper pain from the much-discussed mortgage renewal wave.
And the trouble that’s roiled the city’s condo market over the past two years certainly hasn’t helped, presenting unforeseen challenges for investors suddenly faced with a looming cash crunch.
Higher carrying costs, investor woes add to Toronto’s arrears problem
The investor story is an important one in Toronto’s overall arrears outlook, CMHC deputy chief economist Tania Bourassa-Ochoa told Canadian Mortgage Professional, because of the high concentration of investors in the condo segment.
“We know that in the last few years we’ve seen carrying costs increase quite significantly: property taxes, condo fees, insurance, even mortgage rates as well,” she said.
“And it’s harder to rent [out] right now – longer leasing times, a lot of competition out there. Some are offering one free month, two free months. And that’s resulting in a lot of investors that are now in a negative cashflow position.”
Those pressures are weighing against plenty of so-called “mom-and-pop” investors renewing their primary mortgage, while other homeowners are lumbered with mortgage costs and debt loads significantly higher than most other parts of Canada.
For investors saddled with an unprofitable condo, there are no quick fixes in a bleak market. “The market liquidity is not there,” Bourassa-Ochoa said. “If you’re facing the unwanted situation of having to sell your property, prices in the condo segment have declined by 20% since the peak in 2022 to today.
“If you look only at presales in Toronto, at the current level of inventory that has piled up and the current level of demand for these preconstruction condos, it would take something like 15 years for the current demand to absorb the condos. And that’s obviously resulting in higher mortgage arrears.”
Among the cohorts struggling the most with mortgage arrears and renewals across Canada are first-time homeowners who purchased during the pandemic.
Many of those buyers were able to purchase a home – even at a higher price – because of the rock-bottom interest rates of the COVID-19 era, but have seen borrowing costs spike after 2022 as rates climbed.
That trend was particularly strong in Canada. “Those pandemic-era first-time homebuyers were very present in the Toronto area,” Bourassa-Ochoa said. “The GTA [Greater Toronto Area] had a lot of those. And that’s yet another factor that’s driving that regional risk.”
No sign of a crash yet despite rising arrears
Toronto may be experiencing a more rapid growth in mortgage arrears than other Canadian markets, but experts are still stopping well short of forecasting a meltdown in the city’s housing and mortgage sectors.
The mortgage stress test, strong household balance sheets, and financial institutions working with borrowers to manage payment shock are all reasons the national mortgage renewal outlook shouldn’t spill into a crisis, according to Bank of Montreal (BMO) senior economist Robert Kavcic.
And Toronto mortgage brokers have also reported a calm outlook on mortgage renewals even despite plenty of borrowers renewing at higher rates.
CMHC sees delinquency pressures staying “elevated” throughout the year and said regional monitoring will be important – but also isn’t expecting Toronto’s condo market to deteriorate as strongly as it did just before the turn of the century.
“There are a lot of elements that are very different today than what we saw in the 1990s. And part of that is mortgage regulation,” Bourassa-Ochoa said. “The economy, as well, is a lot more diversified in the GTA today than it was in the 1990s.
“The risk is there, definitely, but when we try to compare it to another big economic downturn in history there are a lot of variables that are different and it suggests that it might not be leading to that extent.”
CMP
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