As a country that encourages home ownership by making your principal residence a tax haven, it’s no surprise that an estimated two thirds of Canadians own their home. With home ownership comes mortgage debt, and when it comes to Canadian real estate, discussions around home values are often in news headlines. In the provinces that host the majority of the population, namely British Columbia, Alberta, Quebec, and Ontario, you will be hard pressed to find a two week news cycle without some content regarding home prices.
Today, let’s take a look into the financial responsibilities of home ownership, and how Canadians manage their mortgages.
Debt
Looking at the numbers, just how much home-related debt do Canadians currently have?
According to 2023 figures by the Canadian Mortgage Housing Corporation (CMHC), the population currently carries just over two trillion dollars in mortgage and home equity lines of credit (HELOC) debt. For the purposes of demonstrating this eye-popping number, thats the number two, followed by twelve zeroes: $2,000,000,000,000.
Canada’s population count crossed the 40 million threshold earlier this year. Taking into account the approximation that two thirds of Canadians are home owners (40 million people * 66% home ownership rate = 26,400,000 home owners), that means that home owners carry an average of just under $76,000 in real estate debt. All things considered, not bad eh?
Delinquency
For the past several years, interest rates as a dinnertime topic only arose once in awhile when a disgruntled baby boomer exclaimed that when they bought their home, interest rates were 14.25%. According to their rant, the younger generation has it easier. Other than that, most people went on about their days leaving it to their mortgage advisor to think about such matters.
Fast forward to spring 2022: at nearly every party, two newly minted armchair economists will express their opinion on interest rates and inflation. Everyone all of a sudden has their birthday, anniversaries, and the Bank of Canada overnight rate announcement dates memorized. Understandably so - variable rate mortgage holders make up a significant population! According to the Bank of Canada, variable rate holders have around 33% of Canadian mortgage debt.
With all the frustration of ballooning monthly payments, there are undoubtedly those who are going to be squeezed, right? Not everyone can sustain the pressures of inflation and some will miss mortgage payments or have to sell, right? Prices will come down as a result, right?
Well as you can imagine, when someone asks three questions ending in the word “right” in any blog, they are obviously trying to make a point that something going on is counter-intuitive.
Sure enough, here come the statistics, and two key ones at that.
Canadians don’t miss mortgage payments. As of Q2, 2023, the mortgage delinquency rate (defined as 30 days passed with a mortgage payment missing) is 0.15%. Let that sink in. Despite all of the interest rate increases and pain inflicted, 99.85% of mortgage payments are still being made on time.
What about the population that just couldn’t handle it and decided to sell? Enough of those cases means that home prices should decline. Yet here we are, from August 2022 to August 2023, where the national average sale price of a home has increased 2.1%.
Debt free ownership
This is where things get really interesting. Remember that astounding two trillion dollar debt figure we talked about earlier?
Well with each mortgage or home equity line of credit, there is a home attached to it. And naturally, that home has value. As we know all too well, especially for those who live in the Greater Toronto Area or Greater Vancouver, those homes have lots of value. It’s not always the concrete, wood, glass, metal, and systems that make up the home, but rather the dirt underneath them.
As of 2020 assessments, Canadian real estate carried a value of $6,100,000,000,000. Yes, over six trillion dollars. Triple the total housing debt held within the country. So where is all the value held? Respect your elders, or don’t - that's up to you. Whether by luck or by hard work, over 41% of homes in the country are held by the population age group between 56 - 75.
If you’ve been following closely here, you’ll notice that there is a sizeable gap between the equity within the nation’s property values and the homeowner debt owed - something to the tune of $4 trillion. Where does that money lie? Looking at just our local market, it is estimated that over $235 billion is held in clear title homes owned by 55 - 74 year olds in Metro Vancouver. Let’s repeat that: clear title… meaning a home with no mortgage, no line of credit. A home that costs the home owner nothing but annual property taxes and house maintenance.
Undoubtedly, many Canadians have been feeling the pinch of rising interest rates, especially those who are entering or have entered the market over the past eighteen months. Variable rate mortgage holders too have been stung by the rapid rise in ownership costs. Relief would have been welcomed by many if property prices had relented over the same time period, but as illustrated by the numbers above, Canadian home buyers are currently subjected to high prices and high borrowing costs.
Nevertheless, it is notable how responsible homeowners are in this part of the world, at least when it comes to paying their mortgages. For those who are hoping for the big homeowner crash, given the amount of equity held in real estate, constrained supply, and general demand to own, this seems unlikely. Corrections will happen whenever pessimism rises, but if history has taught us anything, corrections are short-lived and Canadian home values will continue to rise over the long haul.
If you have any questions on real estate ownership, debt, or the housing market in 2023, feel free to reach out to me anytime at adil@adilkhimani.com
Thank you for reading,
Adil