Canadian mortgage lenders see higher loan losses, average value jumps 68%

Canadian real estate is starting to see the first sign of stress from rising interest rates and normalizing demand. Canadian mortgage lenders begin to write off larger mortgages in the third quarter of 2022, the largest in nearly a decade. Credit bureau data shows that’s not yet a problem, as the share of mortgages written off continues to decline. Fewer new borrowers and declining liquidity likely means the rate cut is just a lag.

Mortgage losses are about liquidity, not the health of the borrower

There are a lot of misconceptions about losses and low default rates, so let’s quickly address this issue. Loan losses indicate a lack of liquidity, not necessarily the health of the borrower. In a booming market, anyone will buy anything at any price, which means a distressed borrower can sell before they default. A seller must be forced to sell and unable to find a buyer at the price he needs for increased losses. Low default rates are more indicative of a bubble than anything else, while small increases are not necessarily a bad thing.

The size of mortgage losses in Canada increases by 68%

Canadian mortgage losses are rising sharply these days. The average loss reached $96,000 in Q3 2022, up 17.1% ($14,000) from the previous quarter. That’s a whopping 68.4% (US$39,000) more than the same quarter last year. Losses are taken after home value is included, so they tend to decrease as home prices rise. The last time it was this high was in 2015, so it’s a trend worth paying attention to.

Average Canadian mortgage loss among lenders

The average dollar value written off by Canadian mortgage lenders.

Source: CMHC; Equifax; Live better.

The share of mortgage defaults has fallen further

The share of mortgages represented by write-offs continued to decline. The rate fell to just 0.03% in the third quarter of 2022, down 0.01 points from the previous quarter and 0.2 points lower than the same quarter last year. We haven’t been able to find such a low number in at least 10 years, likely setting a new record. The unnatural number is one of the lowest in decades.

Canadian mortgages written off as a proportion of total

The share of mortgages written off by Canadian mortgage lenders.

Source: CMHC; Equifax; Live better.

Bearing in mind that liquidity is the most important message here, the data comes across as a mixed message at first glance. On the one hand, losses are increasing, indicating that buyers are rejecting higher prices, which tends to happen when interest rates rise. People default before they can sell at higher prices. This usually precedes an increase in the default rate as buyers stop rushing to buy any inventory they can find.

At the same time, the share of mortgage loans turning into losses is decreasing. This is typical of a very high demand environment – some would say “sparkling”. This is only the second quarter after interest rates have started to rise and an entire quarter’s non-payment is required to declare a default. Most likely, the share of mortgage print losses will start to rise to healthier levels, especially as growth in new mortgages slows.

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