Canada’s banks are still discovering the extent of the mortgage leverage problems their customers face. Canadian Bankers Association (CBA) data shows the mortgage arrears rate climbed in December, hitting a nearly 5-year high. The rate was driven by an abnormally large monthly jump in mortgages entering arrears.
Canadian Mortgage Arrears Rate Approaches 5-Year High
CBA mortgage arrears rate: Mortgages at least 90 days past due (DPD) as a share of total mortgages at CBA member banks.
Source: CBA; Better Dwelling.
Canada’s banks are seeing their mortgage arrears rate climb at an unusually brisk pace. The arrears rate added 1 basis point (bp) to 0.26% in December, 4 bps higher than last year. It’s the highest rate since June 2020, and aside from that brief pandemic spike, one has to go back to 2017 to see this level. The absolute number isn’t all that important; it’s the velocity that matters.
A high rate might sound problematic, but no movement means the problem that was driving the growth is finally contained. Growth means the scale of the issue has yet to be determined, and the faster the growth, the larger the misallocation of resources. This means either a period of stagnation while fundamentals catch up, or a sharp correction to restore market efficiency.
What we’re currently seeing is sharp growth. That 4 bps climb sounds small, but it means that the arrears rate itself grew 18.2% over the past year. Since hitting a policy-driven record low of 0.14% in June 2022, the rate’s added 12 bps. More bluntly, banks have seen their total mortgage pool shrink 3% while delinquencies surged 75%, driving the arrears rate an impressive 85.7% higher. Investors dream of that kind of growth rate—just not when it comes to an arrears rate.
Canadian Mortgage Arrears See One of The Largest Jumps On Record
Mortgages in arrears: Mortgages held by CBA-member banks at least 90 days past due.
Source: CBA; Better Dwelling.
The climbing rate was driven by surging delinquencies. Mortgages in arrears climbed an abnormally large 4.2% (+520 mortgages) to 12,900 in December, 17.7% (+1,941) higher than a year prior and 77.3% (+5,626) above August 2022’s record low. Excluding June 2020, one has to go all the way back to early 2017 to find a similar volume. Again, the total number isn’t the issue—it’s the velocity.
Canada’s banks have rarely seen a monthly jump of 520 delinquent mortgages. It’s roughly 100x the historical average growth, and within the top 5% of monthly surges on record. The last month to make a similar jump was May 2020, at the onset of the pandemic and before policy measures were rolled out to stop the bleeding (inadvertently amplifying the issue). Similar jumps were also seen in 2011, 2008-2009, and during the late 1990s. None of those periods were particularly bullish for the real estate market, nor did they signal a turnaround.
English (US) · 