While the rate of mortgage deferrals in Canada remains in the double-digits, it has been on the decline in recent months, blunting concern of a looming ‘debt deferral cliff’. Data collected by the Canada Mortgage and Housing Corporation (CMHC) and made available to Yahoo Finance Canada show that deferrals fell to 10.89 per cent in August from 12.28 per cent in July.
The data did not come as a surprise to CIBC senior economist Benjamin Tal, who says debt deferrals will not be as severe a problem as many initially thought. Tal describes an economy finding its footing with a recovering job creation rate, and dual income households that reduce the need for deferral. Interest-only mortgages and longer amortizations could be on the table to provide Canadians the flexibility they need to keep up with payments, he added.
“Delinquency rates will be rising. There's no question about it. I estimate that we're talking about roughly $7 billion of mortgage deferrals overall,” Tal told Yahoo Finance Canada. “But it's not the cliff that people are waiting for.”
Ron Butler, mortgage broker at Butler Mortgage, held the same view - especially since some mortgage holders who were still employed elected to defer their mortgage anyway, to stockpile savings in the face of uncertainty.
“We've watched the steady accumulation of growth in people's chequing and savings accounts in Canada for the last six months,” Butler explained. “So that may take another two or three months off this ‘debt cliff’ and it may just turn out to just be a ‘gradual slope’.”
Butler added that the trends won’t affect all regions and property types evenly, pointing to the Ontario condo segment used for rental income investments as a particularly affected space. Provincial industries have also been unevenly impacted by the pandemic, reflected in the deferral rates.
Evan Siddall, president and CEO of CMHC, released a provincial breakdown of deferral rates on Twitter, showing Alberta has the country’s highest rate of deferrals at 18.9 per cent. Butler explained that the situation in Alberta is to be expected with the severe downturn in the oil sector this year, as well as deep real estate impacts from Alberta’s 2015 recession from which the province hasn’t fully recovered.
Further CMHC data released on Wednesday reveal that major cities were unequally affected as well, with Edmonton and Calgary leading the rate of deferrals at 21 per cent and 18 per cent, respectively.
August @CMHC_ca deferrals by select major cities:
Vancouver - 11%
Kelowna - 12%
Calgary - 18%
Edmonton - 21%
Regina/Saskatoon - 14/15%
Winnipeg - 11%
Toronto - 12%
Ottawa - 7%
Montreal - 10%
Quebec City - 7%
Halifax - 10%
St John’s - 14%
— Evan Siddall (@ewsiddall) October 14, 2020
Higher Savings, Lower Spending
Among higher income Canadians, deferring mortgages provided an opportunity to park extra funds in savings, as they also scaled back on discretionary purchases during the pandemic.
“I think what it turned out to be was that the government was actually okay with the idea of people stockpiling money,” said Butler in response to Canadians deferring payments without needing to. “The fact that they deferred and accumulated cash, we think, is helpful to Canadians in the long-run.”
With concerns surrounding a second wave, Tal suspects that the ‘fear factor’ will encourage Canadians to maintain a higher savings rate. Despite the preference for saving rather than spending during these months, Tal doesn’t expect that it will be a large factor weighing negatively on consumer spending.
“Then the second dimension is delinquencies, and how many of [the mortgage holders] will not be able to service that debt,” Tal explained. “This number would be relatively small, although it could be higher than it was before the crisis.”