Homeowners better set for downturn
Run-up in housing prices means Canadians have lower loan-to-value ratios, Re/Max says
Canadians are in a better position to weather the housing downturn than they would have been 10 years ago thanks to an increased amount of equity in their homes, says a new report from Re/Max Canada.
The company is forecasting a 3.3 per cent decline in national home prices this year. But the run-up in prices over the last decade means Canadians have lower loan-to-value (LTV) ratios, according to the company’s 2023 Housing Barometer report published Tuesday.
The ratio, which measures the amount of a loan against the value of the mortgage applicant’s home, has declined in eight of 12 major markets between 2012 and 2022 — meaning that borrowers have more equity against which to secure their mortgages.
“Because (mortgage) rates were so low for so long, people were paying off big swathes of their mortgages month after month,” said Re/ Max president Christopher Alexander.
“There’s definitely people that have overextended themselves and are feeling the pain. But generally speaking, we’re in a better place than we were a decade ago,” he said.
His comments come less than a month after the CEOs of Canada’s biggest banks warned that tens of thousands of Canadians could be at risk of defaulting on their mortgages in the face of rising interest rates.
Loan-to-value ratio is one criterion banks use to evaluate borrowers’ risk, said Alexander.
Re/Max reports that the lowest LTV ratios were found in the most expensive markets, with Toronto dropping to 53 per cent from 63 per cent in the last 10 years; Hamilton at 54 per cent, down from 68 per cent; and Vancouver at 50 per cent, from 59 per cent in 2012. The report is based on CMHC-Equifax Canada data.
It showed Canadians have raised their credit scores while mortgage delinquencies have fallen.
In the GTA, the intergenerational transfer of wealth has meant buyers are entering the market with bigger down payments thanks to gifts from their parents and, despite eight rate hikes since March, home prices appeared to be holding steady in the last quarter of 2022.
Alexander said the high demand from a growing population, buoyed by immigration and low inventories of housing, were helping elevate home prices.
But Re/Max noted that banks are continuing to tighten lending criteria and some bank appraisals are coming in below the purchase price “sending buyers scrambling to make up the difference.”
Nevertheless, Alexander said, “Equity has gone through the roof.”
“The ‘bank of mum and dad’ played a huge role and remote working has allowed people to keep their jobs and move to more affordable (location) options.”
London and Moncton showed the biggest LTV declines of 21 per cent each thanks largely to rising home values in those secondary cities, he said.
Despite the overall optimism of the report, Alexander acknowledged the last year has been distressing for some homeowners.
“If you bought a year ago, more than likely you’re in a negative position because prices have come down,” he said.
People are staying in their homes longer because the high cost of homeownership, added to interest rates, is making it more difficult to move up.
“The average time people stay in their homes has gone up to about 10 years now. It used to be seven,” said Alexander.
Ron Butler of Butler Mortgage Inc. said that the distress some homeowners are currently experiencing cannot be understated.
“If your mortgage payment has increased 45 per cent to 55 per cent, the fact that the mortgage is only 50 per cent LTV fixes nothing for the consumer,” he said.
“It is only good news for the lender who knows that if a 50 per cent LTV falls into arrears, the consumer can easily sell the house or obtain additional lending to remedy the default,” said Butler.
Another financial expert warned that gauging the financial health of homeowners via the LTV paints an incomplete picture. It doesn’t consider debt many people accrue from their Home Equity Line of Credit to help pay for their home, said Laurie Campbell of Bromwich + Smith insolvency trustees.
“It does not impact individuals that bought a home in the last three years,” she said. “It really negates many issues that new homeowners, those renewing their mortgage and individuals that had got HELOCs during these unprecedented increase in (home) value times,” she said.
Mortgage broker Butler warned against downplaying the warning that the bank executives issued earlier in January, despite fallen delinquency rates.
“Defaults are a lagging indicator and are guaranteed to increase in this rate climate,” he said.
The loan-to-value ratio has declined in eight of 12 major markets between 2012 and 2022 — meaning that borrowers have more equity against which to secure their mortgages