In the most recent Mortgage and Consumer Credit Trends Q3 2018, Canada Mortgage and Housing Corporation’s (CMHC) reports that the total number of delinquent mortgages in Vancouver have remained basically unchanged over the past 4 quarters. As it stands right now, the rate is at 0.1% for Vancouver; a number well below the provincial average of 0.16%.
Mortgage delinquency rates are quite low, and they were in a downward path from 2014 until 2017. This downward trend was caused by a multitude of demand side factors such as a decrease in unemployment rates, home values increasing across all property types, low interest rates, and a steady population growth.
But that downward trend came to an end in Q3 2017. Following a slowdown in home sales caused by the mortgage stress test, rising interest rates, and a slowing job growth in the province, the Greater Vancouver Area’s mortgage delinquency rate came to a full stop.
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Though we only have a quarter’s worth of data, CMHC’s Mortgage and Consumer Credit Trends Data reports that as of Q2 2018, mortgage delinquencies are beginning to ever so slightly trend upwards. Though it’s no cause for alarm, if we understand the factors that cause an increase of delinquency rates with Vancouver’s current real estate market conditions, we have a good reason to believe that if nothing else changes, the mortgage delinquency rate will go up.
What causes the mortgage delinquency rate to increase?
It’s easy to get nervous about rising mortgage delinquency rates, especially if we remember the worldwide housing crisis of 2008. But let’s not forget that mortgage delinquencies are not the same as a foreclosure. A mortgage delinquency happens when a monthly mortgage payment isn’t made before the due date. If this were to happen, the borrower has a number of options. First of all, the borrower has 30 additional days to pay it off before he or she is marked as delinquent. If the borrower isn’t able to do so, he or she can negotiate a forbearance arrangement with the lender. If the borrower isn’t willing or able to fix his delinquency, and continues to accumulate unpaid months, then the lender may begin foreclosure proceedings.
Defaulting on you mortgage is no joke and can wreck your credit score. That’s why the vast majority of sane mortgage carriers avoid delinquencies like the plague. In most cases, mortgage defaults happen due to negative changes that happen in borrower’s lives, such as sudden unemployment, sickness, or death of a family member.
Of course, there are cases in which the borrower may have made some poor economic decisions at the wrong place and at the wrong time, such as taking on an unnecessarily large adjustable rate mortgage right before the Bank of Canada raises its overnight interest rates.
Life is uncertain and individual delinquency cases can happen at any time, even during excellent economic conditions. But provincial or regional mortgage delinquency rate increases don’t just happen for no good reason. Though we could spend hours talking about all the different supply and demand side variables that affect a market, they can all be boiled down to a single word: liquidity.
In a nutshell, liquidity refers to the ability of an investment to be turned into cash. The easier it is to cash in an investment, the higher its liquidity. Bonds and stocks have high liquidity, since turning them into cash is a simple matter of hitting the sell button. Precious metals also have high liquidity, since there’s always many buyers. Real estate, on the other hand, does not have the same level of liquidity, as the process to sell always takes more time.
When the market is hot, interest rates are low, credit is easily accessible, and unemployment is low, sellers can sell their home relatively quickly and at a great price. In that situation, real estate has a high amount of liquidity, since it could be sold relatively quickly. If a home owner falls into economic hardship during a hot market, and can’t afford to make mortgage payments any more, he won’t even be marked as a mortgage delinquent, as long he sells his home within 60 days. His credit won’t even take a hit. Therefore, during a hot real estate market, mortgage delinquency rates go down.
But when market conditions soften, with interest rates rising, job growth slowing down, and the government making it harder to qualify for a mortgage, homes take longer to sell. In this situation, if a homeowner cannot afford to make his mortgage payments, and is forced to sell his home, he may not be able to do so quickly enough to avoid a mortgage delinquency. In other words, when liquidity goes down, mortgage delinquencies go up.
The February Greater Vancouver Real Estate Board Stats were just released, and housing market conditions continue to favour buyers and the number of motivated buyers is lower right now than it has been for some time. We can safely say that the housing market’s liquidity is trending downwards. And unless something changes, we will likely see the mortgage delinquency rates go up.