Jay Mcinnes

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Is Everyone Defaulting & What Does It Look Like?

Is Everyone Defaulting & What Does It Look Like?

The question on everybody's mind when it comes to Real Estate and Mortgages. Are people now defaulting due to higher interest rates, and if so, what does that look like? For buyers, this is the age old fable of ‘Sellers NEED to sell, so I will get a deal’.
How true is that statement though really? When looked at more closely, it’s not at all, in fact it’s quite the opposite. For me, the scenario that occur when one ‘NEEDS to sell’ looks like the following: 
  • They took on more than they could afford. This may come as a mortgage they cannot afford after renewing at higher rates, subprime mortgage debt, or a few other scenarios of course. Essentially they cannot afford to keep the property. They have to sell. Thankfully here in Canada it is a legal requirement to clear title of any financial charges (mortgages, liens etc) before the transfer of title can take place. This type of seller CANNOT reduce the price as they won’t have enough money to clear title and sell. So they sit on the market at higher prices. E.g. A seller must make $1.4M after fees in order to clear title and sell. If you as a buyer offer them $1.2M, they physically won’t have enough funds to carry out the sale. This is a common scenario in pre-sales as well. Those who purchased high, thinking the market would increase further and they could sell for profit. When in fact the market decreased.

Sure, we can get other types of sellers out there, but there motivations come from more of a desire, as opposed to a need:
  • Sellers who took on more debt than they desired. The difference from above is key. This is the seller who can afford to either carry the monthly costs themselves or do so temporarily through a tenant etc. They would like to sell and ideally make a premium. Yet they are open to breaking even or possibly even a small loss. However, they are not forced into the decision to sell.

  • Other regular sellers who are looking to partake in the market for usual purposes. Selling in order to upsize/downsize etc of course.

As we are so highly leveraged, spending machines here in Canada, especially when it comes to Housing, it’s just not an option to sell for that ‘steal of a deal’ anymore. The debt levels, coupled with market values just do not allow it. Even on foreclosures, you can win the initial bid, however your offer will be made public, and everyone has a chance to come in and beat it at court. Market value is relatively easy to find out, so even a foreclosure with an offer $300,000 under market value will be exposed to the market during the bidding process and can (and most likely will) be knocked off for the higher bid. After all, there are enough people out there happy to have the equivalent of a 5% market value discount, rather than let you have a 15% discount.
So what do mortgage default numbers actually look like now? It’s still a bit early to tell, technically to be regarded as ‘In default’, the mortgage needs to be 90 days in arrears. So 90 days back only starts to hit on a small number of the interest rate hikes we’ve seen. As to what we can see, the below table from CMHC shows mortgage rate default rates actually decreasing:

You can find the full chart at the following link: https://www.cmhc-schl.gc.ca/en/professionals/housing-markets-data-and-research/housing-data/data-tables/mortgage-and-debt/mortgage-delinquency-rate-canada-provinces-cmas
As for Bank Mortgage Loss write offs, they have reported an average loss of $96,000. That’s a 17% increase from last quarter, and a 68.4% increase year over year. Numbers not seen since 2015. In theory when prices eventually start to rise, we will see that average figure reduce. More value in a home means less of a loss. The share of mortgage loss write offs has, as of now, decreased. A total of 0.04% of mortgages actually incurred a write off. Down 0.02% from last year. This, I would expect to be a lag though, so I would envision those shares of mortgage losses to increase over time, especially considering the rate hikes we’ve seen.
So what do these figures even mean? The rates on people defaulting, therefore needing to sell, are relatively low, and have been recorded as decreasing so far. Real Estate is a numbers game. We need things to happen in large amounts to make a difference, whether that's an increase or decrease in pricing. In BC, 0.11% of mortgages are in default, Ontario 0.7%, Prince Edward Island 0.15%. Very small amounts overall. So for those out there hoping for that ‘epic deal’, you could be waiting a long time. Plus, as per the numbers, not enough households are defaulting to shift things heavily in buyer favour.
As always, thanks for joining along for this week's read. We love your feedback and comments, so don’t be afraid to let us know what you think?