Canadian debt problems are still surfacing despite a mad dash to slash rates and stimulate growth. Canadian Bankers Association (CBA) data shows mortgages in arrears climbed in January. Since setting a record low a few months ago, the arrears have climbed over 50% to hit the highest rate since 2021.
Canadian Mortgage Arrears
Today we’re looking at the CBA’s mortgage arrears rate. A selected group of CBA members report the share of their mortgages at least 90 days past due. A loan is technically in arrears when the payment is a day late, but lenders only really begin to worry when 3 payments have been missed. That’s when the odds of shorter defaulting on their loan rises significantly.
Mortgage arrears are one of the most misunderstood economic indicators. It’s often thought of as a sign of household weakness, but it’s more often a sign of liquidity. Households get in over their head during a booming market as well, it’s just they can sell their home the moment they struggle with payments.
Only when the liquidity dries up do they struggle to unload a home. A rising arrears rate often means the market is too high for the property to be absorbed within a reasonable time frame.
Canadian Mortgage Arrears Rate Hits The Highest Level Since 2021
Canadian mortgage borrowers are having a tough time coping with the slowdown. The CBA’s mortgage arrears rate climbed 0.04 points to 0.22% in January. It was over 57% higher than the record low last seen in mid-2022, and the highest rate since March 2021. It still has yet to return to pre-2020-levels, but it’s within spitting distance and heading the wrong way.
[Charts]
Few should be surprised considering the decline in home sales—new and resold existing homes. The rapid acceleration of interest rates and a trade war likely helped to remove further liquidity as buyers wait for the dust to settle.
However, it’s worth noting that this trend began before the trade war. A point made even more salient by the fact policymakers ordered banks to make a proactive effort to work with borrowers to prevent rising arrears. Even with an attempt to suppress the rate, it’s climbing higher.
Canadian Mortgage Arrears Data Skews By Reporting Parties
The CBA glossed over the uptick, noting that it’s still lower than the U.S. and UK data. Before seeking comfort in that point, it’s important to understand the CBA data only includes the Big Six, CWB, Laurentian, Manulife, and Equitable. It doesn’t include credit unions, non-bank lenders, and most important—private lenders.
The CBA arrears rate is often used as a national rate, but it only includes the highest quality segment of lenders. By excluding riskier borrowers, including the ones they ask to leave, the data skews towards overperformance. The UK and U.S. have more open, comprehensive looks at their data with an open land registry.
Comparing them against other countries isn’t particularly useful in this case. What is important, is taking stock of the fact the rate is rising compared to historical delinquencies, and it’s rising fast despite mitigation efforts. The erosion of liquidity is real, even if prices have yet to respond to it.