Mortgage payments outpacing income growth
in Canada: Zoocasa
BNN Bloomberg
Mortgage costs have grown faster than incomes over the past decade, according to a new report from Zoocasa.
The analysis released Thursday looked at average mortgage payments across 17 Canadian cities from 2013 to 2023 and compared the figures against average incomes.
It highlighted that while home prices in Canada have risen over the past decade, interest rates remained consistent until recently, having risen to 15-year highs after reaching historic lows in 2021.
“Both of these factors have contributed to an increase in monthly mortgage payments,” the report said. “With income growth struggling to keep pace, some homebuyers are taking a step back from the real estate market.”
In 10 of the 17 cities analyzed, Zoocasa found that mortgage payments increased by over 100 per cent and incomes by 16 per cent or less during the time period.
“Over the last ten years, average monthly mortgage payments increased in every city analyzed, with the majority of cities’ mortgage payments increasing by more than $1,000 and four cities increasing by more than $3,000 since 2013,” the report said.
Cities in Ontario and B.C. may experience higher than average incomes, however, the report noted monthly mortgage payments in both provinces “were up substantially.” Particularly, Hamilton-Burlington and Barrie District were highlighted as having the largest increases in mortgage payments.
In Hamilton-Burlington, the average monthly mortgage payment rose by $3,354 over the past decade, the report said, rising to $5,034 in 2023 from $1,680 in 2013.
Barrie District “followed a similar trajectory,” the report said, with the average monthly mortgage payment rising to $4,778 in 2023 from $1,442 in 2013, marking an increase of $3,336.
The report attributed the increase in mortgage payments in both regions to rising home prices, which increased by over $500,000 between 2013 and 2023.
The Greater Toronto Area saw mortgage payments increase by 129.8 per cent during the time period, while average incomes rose by only 16 per cent, the report said.
Victoria saw mortgage payments increase 158 per cent on average while incomes rose only 15.2 per cent.
METHODOLOGY:
Zoocasa’s report looked at home prices from 2013 to 2023 in 17 cities and calculated average mortgage payments during the time period assuming an average-priced home with a minimum down payment and a 25-year amortization using the five-year fixed rate in September of each year. Average payments were then compared relative to average annual income figures from Statistics Canada, the report said.
ECONOMICS: RATE PAUSE TO BENEFIT
RENTERS: EXPERTS
, BNN Bloomberg
Oct 25, 2023
The average cost to rent a one-bedroom apartment in Canada hit a record high of $2,117 per month in August, marking a 9.6 per cent annual increase, according to data from Rentals.ca.
Rent climbed even higher in the country’s most populated areas. In Vancouver, a one-bedroom apartment rose 13.1 per cent year-over-year to $2,988 in August. In Toronto, the same unit rose 10.5 per cent to $2,620, the data showed.
Experts told BNNBloomberg.ca that a rate pause from the Bank of Canada will likely help dampen these dramatic rent increases, because a stable overnight lending rate makes costs more predictable for both landlords and tenants.
The central bank announced Wednesday that it would hold its benchmark interest rate at five per cent for the second consecutive time.
“This rate hold will make things a lot easier for the rental market because it is signalling stability,” Mike Stewart, a Vancouver-based realtor, told BNNBloomberg.ca in a phone interview.
The pause signals that the central bank sees inflation as coming under control, which indicates to renters that their living costs will stabilize overall, he added.
“The rate hold might also prompt some sidelined homebuyers to enter the market, thereby freeing up rental supply, which should ease some of the pressure renters are feeling as well,” Stewart said.
While some landlords might be tempted to raise rents should their current tenant leave, the market will ultimately set the rates, he argued.
“What we’re seeing is an overall softening in Vancouver rents as the market begins to balance out amid rate holds,” Stewart said.
Toronto-based realtor Davelle Morrison echoed Stewart’s sentiment.
“The rate pause is an overall good thing for the rental market as it gives landlords a sigh of relief that their mortgage won’t go up any further, meaning they won’t need to necessarily increase their rent,” she explained.
NOT A LONG-TERM SOLUTION
While the decision to keep rates on hold may help cool the rental market, trends in longer term bond yields could provide an offset, according to an economist with the Canada Mortgage and Housing Corporation (CMHC).
“The rate pause will help ease the pressure on the rental market, but what worries me is the rise in bond yields,” Bob Dugan, chief economist at the CMHC, told BNNBloomberg.ca in a phone interview.
The average first-time homebuyer will usually lock in a fixed-rate mortgage based off a five-year government bond, and these bond prices have risen in the past few months, he explained.
“The expectation that the Bank of Canada will keep rates high for longer is being reflected in higher bond yields, and just because the (Bank of Canada) might cut rates in the foreseeable future, it doesn’t mean these bond yields will follow suit,” Dugan explained.
The bond moves pose risks of elevated costs for future homeowners, despite what direction the Bank of Canada moves in next, and Dugan argued that the effect will be continued cost pressures sector-wide.
Mortgage payment shocks pose risks to
Canadian banks: RBC
, BNN Bloomberg
Payment shocks from mortgages renewing at higher interest rates over the next three years may pose a substantial tail risk to Canadian banks, according to a new report from RBC Capital Markets.
The RBC analyst and associates behind the report published Monday wrote that around 60 per cent of all outstanding mortgages with Canadian chartered banks will be up for renewal during the next three years. This will lead to payment shocks, referring to the increased payment at renewal, according to the report, with related risks of possible impacts on loan and revenue growth at chartered banks, as well as have spillover effects on other forms of credit.
Barring any “significant declines in interest rates,” the report says credit losses will rise in 2025 and beyond as a result of the mortgage payment shock trend.
“Some have suggested that mortgage payment shock could be viewed as a tail risk possibility because mortgage payment shock hits harder out in 2025 and very hard in 2026, and it is difficult to see interest rates staying this high for that long,” the report said.
EXPECTED TIMELINE
The research comes as the Bank of Canada has raised interest rates to five per cent from near-zero over the past year and a half, in a bid to bring down high inflation.
The report laid out a timeline explaining for when higher rates at renewals are expected to kick in at the major Canadian banks, and the scale of expected related payment shocks.
“We believe there will be more than $186 billion of mortgages renewing in 2024 at the chartered banks in Canada and at current interest rates (for example, the five-year fixed mortgage rate of 5.54 per cent is over 180 basis points) higher than five years ago), a weighted average payment shock of 32 per cent could be expected,” the report said.
In 2025, RBC is expecting about $315 billion in mortgage renewals at chartered banks, more of which are variable rate mortgages and many of which are “currently negatively amortizing.” The resulting weighted average payment shock from renewals in 2025 is anticipated to be similar to 2024, at around 33 per cent.
“Fiscal 2026 renewals have the largest proportion of variable-rate mortgages and consequently, unless rates fall meaningfully, the payment shock could be as high as 48 per cent on a weighted average basis,” the report said.
SPILLOVER
Increased mortgage payment shock is likely to impact loan and revenue growth at banks, the report said. Mortgage payment shocks are expected to slightly impact mortgage delinquency and have a spillover effect on other forms of credit, the report’s authors said.
However, the experts wrote they are not concerned about mortgage losses because mortgage delinquency rates and unemployment rates are currently below pre-pandemic levels.
“We believe there may be a spillover of credit losses onto other loans (i.e., unsecured credit and auto loans), but we do not yet see evidence of significant credit deterioration except for a specific subset of commercial real estate (office space),” the report said.
RETAIL BANKING OUTLOOK
The report’s authors maintained a “tepid growth outlook” of about four per cent in 2024 and about three per cent in 2025 for revenue growth in retail banking.
The retail banking industry will be “managing through this phenomenon carefully with slow loan growth, low NIMs (net interest margin), and fee pressure,” the report said.
Net interest margin measures the difference of how much a bank generates from interest on loans compared to how much it pays in interest.
WHAT ARE THE BANKS DOING?
Canadian banks are working proactively to lower the impact of payment shocks, according to the report.
“Customers are given a range of options including increasing monthly payments, switching to a fixed rate, making a lump sum payment, or extending the amortization period,” the report said.
The RBC experts wrote they will “continue to track” increases in mortgages with over thirty-year amortization periods while assessing the efficacy of those measures.
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