The days of Canada having a reputation of conservative bank practices are coming to an end. In a new research note from the IMF, the global financial agency ranked mortgage default risks for households. Canada’s combination of high household debt, frothy home prices, and floating rate loans makes it the riskiest advanced economy in the world.
Canadian Mortgages Have The Highest Risk For Mortgage Defaults
Canadian mortgages have the highest risk of default in the world, according to the IMF. A combination of high household debt and frothy home prices have increased risk in the market. Households embracing floating, or fixed rate, loans turned it from just overpriced housing into over priced housing with a high risk of default.
The combination of factors amplifies mortgage default risk. “…countries with high levels of household debt and a large share of borrowing issued at floating rates are more exposed to higher mortgage payments resulting in a higher risk of defaults,” wrote Nina Biljanovska, an economist with the IMF.
Housing Market Risk Indicators
Economies with high household debt and more floating-rate loans have greater exposure to higher mortgage payments, and a heightened risk of defaults.
Source: IMF.
Countries with similar devotion to residential real estate investment and floating loans aren’t far behind. Following Canada for risk are Australia, Luxembourg, Norway, Sweden, and the Netherlands.
In case you didn’t catch it, none of those countries have economies close to the size of Canada.
Higher Rates Have Been A Buzzkill For The Global Housing Frenzy
What the heck happened? Global real estate prices surged in 2020, with the IMF attributing it to low rates and tight supplies. Low rates expand credit service capacity and incentivize borrowing, leading to the explosion of investors and overleveraged home buyers. It’s not a fringe theory, but one the BIS, the central bank of central banks, also agrees with.
As interest rates began normalization and stimulus was removed, home prices pulled back. Just lowering the incentive to borrow, and throttling leverage, was enough to pull back home prices.
Defaults aren’t likely in tight markets where home prices are rising, since a home can sell before defaulting. Adding falling home prices into the mix raises the risk of default, since it becomes more difficult to exit in a timely manner, and maintain a profit.
“On the upside, in countries where housing prices grew rapidly, price declines in the runup to the current monetary policy tightening cycle could improve affordability,” said Biljanovska.
The IMF is basing the risk on Canada’s banks following global standards. Banks have been extending mortgage repayment terms decades longer than the maximum allowed, preventing delinquencies, and reinforcing high home prices. The only thing it cost Canada is the reputation of having prudent bank regulation, and increased moral hazard which experts warn can spark a financial crisis.
Government should put a house tax on anyone who does not stay in a house for at least 10 years and makes a profit flipping. Stop all this real estate nonsense.
And this does not even factor in the. Loud looming over condos and strata and special assessment s
Good work better dwelling
I don’t understand how the bank of Canada can possible navigate this ship with inaccurate and incomplete data
This aside from how the non bank arms of our chartered banks behaviour is ignored even after that 114 billion liquidity debt transfer to prevent a freeze up of our financial system from that area. Deeply buried in semantics and denial to try to preserve our banking systems reputation and grade a ratings
Not going to happen. When 38% of the MP’s are landlords and in RE business they will make EVERYTHING possible to keep the circus going.
But the longer it keeps going, the higher the eventual cliff is. I get that the market can and will be (and has been) irrational for a staggeringly long time, but you do know this can’t go on indefinitely right? Like immigration and financial gymnastics can kick the can down the road for a long while, but eventually you do just run out of road.
bingo
Exactamundo, the ponzi must and will continue for perpetuity. Canada is now just for trading houses and watching the leafs lose every year. Our only productive industry is oil and lumber which we tax to oblivion. God bless this nation and may we live long and suffer
Prices across Canada have dropped substantially already and people said that would never happen. Debt is good and helps economies make progress but too much can also hinder and lead to a crisis. And Canadian debt is in that danger zone that leads to crisis. The writing is on the wall yet people deny.
You got it! There’s nothing Canada won’t try for supporting home prices; eventually the gov will introduce a program to buy houses directly from homeowers for their outstanding mortgage balance plus some profit – can’t have any voters feel any pain from their bad decisions 🙁
So the rest of us who didn’t want to play the game will lose out yet again, by never being able to buy at even 2015 prices let alone where they should be – 2005 prices!!
Lol…no subprime here
This could be a lead in for intergenerational mortgages.
Psh. What risk? This data doesn’t take into account that in Canada you can just increase your amortization period to infinity.
George, you are absolutely spot on, just like all the other “investors” who have heaps of money riding on real estate, they will not let the average Canadian own a home on the sort of terms that are anywhere near what we can afford!
Nah. Not when our banks let us keep the same monthly payment no matter the interest rate. Except those with Scotia. Sorry
I’m paying more with Scotia but my amortization is still going down. Those that had a 25 year amortization that have the same payments are above 40 years now. It’s the young first time homebuyers that put 5% down on a million dollar plus home or townhome in Greater Vancouver at a rate of 3% or under that will be standing in line giving the keys to the bank and asking if they could rent it back. Maybe it’s time for a bubble bursting wake up call.
Comments being deleted. No subprime in Canada. Eh?
But if none of the global ratings agencies care about Canada’s banks flouting sound financial rules, then it doesn’t matter what they do. So I’m not sure where the impetus for change comes from. OSFI seems like a joke agency with either no actual power or not a care about this risk at this point.
The so called financial experts have been calling for the collapse of the Canadian real estate market and the banks for decades. What they always fail to understand is, Canadians are fiscally responsible savers who always pay their debts. The market will go down and some people will suffer but they will be no collapse.
This is all part of the dismantling of Canada so its resources can be extracted by US, China, Europe etc. without the bother of having to deal with a nation state…