While interest rate hikes served to destabilize most major Canada real estate markets beginning in 2022, homeowners are well-positioned to ride out the coming storm in large part due to lower loan-to-value ratios on new mortgages, according to a report released today by RE/MAX Canada.
The RE/MAX Canada 2023 Canada Housing Barometer Report examined average price and new mortgage values published by CMHC-Equifax Canada in 12 major markets from British Columbia to New Brunswick, to compare loan-to-value (LTV) ratios between Q3 2012 and Q3 2022. The report found that LTV ratios had declined in 67 per cent of markets (eight) over the past decade, with the greatest drops noted in London and Moncton (21 per cent), Halifax (15 per cent), Hamilton (14 per cent), Toronto (10 per cent) and Ottawa-Gatineau (nine per cent). Four markets, including Calgary, Edmonton, Saskatoon, and Regina, were up over 2012 levels, a trend that is set to reverse in the years ahead as Alberta and Saskatchewan’s economic engines gain momentum and drive home-buying activity. The lowest loan-to-value ratios were found in the most expensive markets, including Vancouver (50 per cent), Toronto (53 per cent), and Hamilton (54 per cent) while the highest loan-to-value ratios were found in Regina (88 per cent) and Edmonton (83 per cent). Nationally, loan-to-value ratios hovered at 57 per cent.
“While challenges certainly exist in today’s high interest rate environment, risk factors for the overall housing market are greatly reduced when homeowners own a larger proportion of their homes,” says Christopher Alexander, President, RE/MAX Canada. “With half of loan-to-value ratios within the 50- and 60-per cent range in Canadian markets, homeowners are better able to withstand downward pressure on housing values and fewer will find themselves underwater, carrying upside down loans.”
(Source: CMHC-Equifax Canada Average Value of New Mortgage Loans; Canadian Real Estate Association; Fraser Valley Real Estate Board; Calgary Real Estate Board; Toronto. Notes regarding average prices: *Ottawa-Gatineau contains blended data to reflect the Ottawa-Gatineau CMA. Earliest statistics available for the Gatineau region are from 2014, creating an eight-year history for the CMA. ** Greater Vancouver contains data blended with Fraser Valley to reflect Vancouver CMA.)
Three factors were largely responsible for the downward pressure on loan-to-value ratios over the past decade, according to the Canada Housing Barometer Report: equity gains, the pandemic facilitating the ability to work remotely in smaller markets, and the transfer of intergenerational wealth, particularly in the latter half of the last decade and the early 2020s.
“Government implemented measures to reduce risk to the country’s housing markets, including the much-maligned stress test, have also gone a long way in maintaining the overall health of the Canadian market,” explains Elton Ash, Executive Vice President, RE/MAX Canada. “The housing market in Canada has a reputation for stability relative to other international markets, and prudent policy plays a substantial role.”
Canadian buyers are much better qualified than a decade ago as a result, according to the RE/MAX report. A recent CMHC-Equifax Canada report confirmed a significant reduction in the number of buyers with credit scores under 660 in the past decade. Nationally, that number fell to 4.7 per cent in the third quarter of 2022, down from eight per cent a decade earlier. Ottawa-Gatineau, at 3.9 per cent, had the lowest share of new mortgage holders with credit scores below 660, while Winnipeg had the highest at 6.4 per cent. The loan-to-value ratio in all markets was down from decade-ago levels.
Mortgage delinquency rates have also fallen in most markets across the country, with the national percentage sitting at just 0.14 per cent – down just over 63 per cent from levels reported in 2012. The lowest rates can be found in Ontario and British Columbia, where the delinquency rates are below 0.08.
(Source: CMHC-Equifax)
Rapid population growth was identified as a primary catalyst in driving home-buying activity over the past decade, with the quarterly population estimate rising 12.1 per cent nationally from Q3 2012 to Q3 2022. Interest rates also played a starring role over the 10-year period, with the overnight rate dropping to 0.25 per cent in May of 2009 and maintaining relatively low levels throughout the 2010s, climbing in 2018 and 2019 only to fall again to 0.25 per cent in 2020.
Population growth is expected to continue in the years ahead, given the federal government’s commitment to increase immigration levels, but interest rates will likely remain relatively high in the foreseeable future, which should temper home-buying activity to some extent, particularly in the first half of the year.
“As we head into 2023, there are likely to be challenges, but a healthy number of homebuyers are expected to continue to enter the country’s housing markets from coast to coast,” says Ash. “The trend toward smaller markets should continue to play out in Atlantic Canada, Ontario and Western Canada —areas where in-migration from more expensive markets has occurred recently. Major centres in Alberta and Saskatchewan are expected to see strong growth in the year ahead as provincial economies continue to operate on all cylinders. However, there could be some tough times ahead for larger markets that are seeing an uptick in over-extended buyers, as well as increased financial hardships for parents who helped their kids into home ownerships by taking out Home Equity Line of Credit (HELOCs). While most chartered banks are typically willing to work with homeowners in distress situations, buyers that chose to work with private lenders are having a different experience, as evidenced in recent stories in the media.”
While overall risk to the Canadian housing market remains low, risk mitigation remains top of mind for regulators, given real estate’s impact on the Canadian economy. The sector has accounted for 10 to 17 per cent of GDP in recent years. The government’s OSFI stress test is among the additional measures aimed at reinforcing the country’s real estate market going forward. While still in development, it would look at addressing three key factors: mortgage size and debt load, new debt service ratios, plus a new interest rate stress test. Given the success of the Stress Test to date (qualifying buyers at two per cent above posted rates since 2018), it’s clear some constraints can prove invaluable. That being said, further measures that would make it increasingly difficult for Canadians to realize home ownership, while well-intentioned, may potentially cause more harm than good.
“At the end of the day, what’s evident by the loan-to-value ratios and by policies to discourage speculation and over-extension is that real estate is and will always be a long-term hold,” explains Alexander. The Canada Housing Barometer Report shows that most purchasers are aligned with that philosophy, as demonstrated by their tenacity to get into the market and hold steady. Savvy homebuyers and homeowners are looking to offset carrying costs by reducing their footprint—choosing smaller homes, as reported in Ottawa, or renting out basement suites in their homes, a trend noted across the board, but especially apparent in London and Saskatoon. Some buyers are purchasing duplexes and other multi-unit properties and living in one of the units. Multi-generational sales are also happening with increasing frequency across Canada, whereby two or three generations live together. This trend was strong in Toronto’s 905 region, as well as in Winnipeg and Saskatoon.
“The bottom line is that the dream and desire for home ownership is unmistakable,” says Alexander. “The mechanisms in place to underpin stability are working, and although more challenging conditions in 2023 may cause some to temporarily take pause, the longer-term outlook remains positive. Once the Bank of Canada has signalled that it is done with quantitative tightening, the market is expected to return to more normal levels of home-buying activity overall.”