Mortgage debt portends an economic crisis in Canada

The data reflect a decade of poor federal policies encouraging excess borrowing in housing market

Canada’s mortgage debt totals close to $1.5 trillion according to the Bank of Canada. $400 billion of that debt is insured, mostly by the Canada Mortgage and Housing Corporation (CMHC), a unit of the federal government. If people can’t pay their mortgages, the federal government is on the hook. This effective debt is not reported as part of the national debt until people default on their payments. While large, that is a manageable problem for government. The real issue is the $1.1 trillion of uninsured mortgage debt.

Given that artificially low rates persisted throughout the period since Justin Trudeau became Prime Minister, I infer that most of this debt is at rates of 3% or less. Today, after the recent rise in the Bank of Canada rate to 5%, mortgage interest rates are now in the 5% to 6% rate and over 7% for Home Equity Lines of Credit (HELOC’s). An estimated $331 billion of mortgages will need to be refinanced in 2024 and another $352 billion in 2025 according to a recent article by Nivedita Balu. When they are, the interest burden on those mortgagees will rise by more than 40% adding an aggregate $17 billion in interest expenses to those debtors. The average mortgage balance is about $370,000 and interest payments for each mortgagee will rise by over $600 a month. Many Canadians cannot afford another $600 a month in payments and will be forced to sell their properties or default on their mortgages. Statistics Canada reports that one in four Canadians could not absorb a rise in household expenses of $500 a month. Rising prices and rising rents are responsible for young Canadians decisions to move, likely more than any other factor.

Why should anyone care? The outcome will manifest itself in a fire sale of homes and a rise in personal bankruptcies, as well as losses for banks and other lenders on the $1.1 trillion of those mortages which are uninsured. The $17 billion of higher interest expenses will put a drag on economic growth as well since that money cannot be spent on goods and services. As people are forced to sell their homes they will be forced to seek accommodation in an undersupplied housing market, driving up rents which are a key component of Canada’s inflation measurement. This vicious cycle doesn’t end well, particularly if rates must keep rising and inflation proves intractable. In my opinion, that is a likely outcome.

Elect a drama teacher as Prime Minister and expect drama, not common sense. If you don’t like this result, oust the Liberals from Ottawa. If you do like it and support Trudeau’s policies, move to a smaller home in a remote area like Timmins or Cochrane where you may be able to afford to live on CPP and OAS if you are over 62 or by getting a job as a laborer in one of the nearby mines hungry for more workers.