In the recently released Fall 2023 edition of the Residential Mortgage Industry Report by the Canada Mortgage and Housing Corporation (CMHC), a comprehensive analysis of the current state of the residential mortgage market reveals intriguing trends and potential challenges for both consumers and industry players.
The first half of 2023 witnessed a significant decrease in home sales, resulting in a slowdown in new mortgage activities across various lender types. Despite this decline, the outstanding mortgage debt continued to rise, particularly in the uninsured mortgage segment. According to the report, borrowers shifted away from short-term mortgage terms, reflecting diminished hopes for an immediate decrease in interest rates. Meanwhile, mortgages with terms of 5 years or more remained relatively low, as consumers opted against traditional, long-term commitments.
As per the report, as of August 2023, the total residential mortgage debt reached $2.14 trillion, representing a 3.4% increase compared to August 2022. Despite a slowdown in mortgage growth, home prices rebounded after a temporary drop in 2023. The report shows that fixed-rate mortgages continued to dominate, constituting 73% of outstanding residential mortgages. Federally regulated financial institutions favored fixed-rate agreements over variable-rate ones, lending $244.5 billion in fixed-rate mortgages compared to $20.1 billion under variable-rate agreements.
The report highlights that the proportion of uninsured mortgages extended by chartered banks increased to 73% in 2023Q2, a significant rise from 45% in 2016. This surge is attributed to regulatory changes tightening mortgage insurance eligibility rules and rising house prices, pushing more properties beyond insurable limits. Non-bank mortgage lenders also exhibited a similar trend, with the value of uninsured mortgages increasing by 9% in 2023Q1.
According to the report, alternative lenders experienced a minimal slowdown in mortgage activity, seizing an increased market share in the first quarter of 2023. Mortgage investment entities and other non-bank mortgage lenders saw a surge in market share, while traditional lenders faced a slowdown in mortgage activity. Despite the increase in market share, the report indicates that alternative lenders’ risk profile witnessed a slight uptick compared to the previous year.
While overall mortgages in arrears stabilized at historically low levels, the report points out that other delinquency indicators raised concerns about Canadians struggling with debt payments. Over 290,000 fixed-rate borrowers faced an interest rate shock during mortgage renewals in the first half of 2023. Factors contributing to increasing vulnerabilities, as mentioned in the report, include a high debt-to-income ratio, doubling interest rates since the previous year, and a significant share of mortgages with variable rates.
The report notes that traditional lenders experienced a slowdown in mortgages for property purchases and refinances in the first half of 2023. Despite the decline in activity, the overall risk profile remained stable, with longer amortizations and stable loan-to-value ratios. The share of new uninsured loans with a high total debt service ratio started to decline, as highlighted in the report, indicating a cautious approach to lending.
According to the report, alternative lenders, including mortgage investment entities, showcased a growing market share in the first half of 2023. While the assets under management of the top 25 mortgage investment corporations grew by 7.1%, the report mentions that their risk profile experienced a slight increase. Delinquency rates and foreclosure rates remained relatively low, as reported, although there was a notable increase in delinquency for mortgages with values of $850,000 and above.
Geographically, as per the report, mortgage investment entities in British Columbia held the largest market share, followed by Ontario. Despite an increase in mortgage arrears for alternative lenders, credit unions, and chartered banks remained stable, according to the report.
The Fall 2023 Residential Mortgage Industry Report highlights the nuanced dynamics within the Canadian mortgage market. While overall stability persists, the report shows the rise in uninsured mortgages, increasing delinquency rates, and the growing influence of alternative lenders, suggesting a need for continuous monitoring and adaptive strategies.