Canada’s homeowners are now better positioned to weather a downturn

By
Millicent Wong
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Financial Post NewsConnect Powered by Postmedia Network

  1. property
  2. mortgages

Falling loan-to-value ratios make homeowners more resilient, argues RE/MAX in the report

A condominium building is seen under construction surrounded by homes in Vancouver, BC on Friday March 30, 2018. Canada's banking regulator is expected to make an announcement this morning regarding the interest rate used in a key stress test for uninsured mortgages. THE CANADIAN PRESS/ A condominium building is seen under construction surrounded by homes in Vancouver, BC on Friday March 30, 2018. Canada’s banking regulator is expected to make an announcement this morning regarding the interest rate used in a key stress test for uninsured mortgages. THE CANADIAN PRESS/ Photo by Darryl Dyck/The Canadian Press files

Rising interest rates and inflation could test the finances of heavily indebted Canadian families, but a new report from RE/MAX Canada suggests homeowners are actually in a better position to weather market instabilities than they were a decade ago.

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The report, released Jan. 31, found that a key metric known as the loan-to-value ratio (LTV), which measures the size of the mortgage relative to a home’s value, has fallen 57 percent today versus 63 percent in 2012. A lower LTV is less risky because it means the homeowner has more equity in their home and less debt.

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“While there are certainly challenges in today’s high-yield environment, risk factors for the overall housing market are greatly reduced when homeowners own a greater proportion of their homes,” said Christopher Alexander, President of RE/MAX Canada. “With half of the loan-to-value ratios in the Canadian markets in the 50 and 60 percent range, homeowners will be better able to withstand the downward pressure on property values, and fewer will find themselves underwater and carrying upside-down loans.”

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When house prices skyrocketed and interest rates were low in the 2010s, LTV ratios trended downward, according to the report, which analyzed CMHC-Equifax Canada’s median price and new mortgage values ​​in 12 major markets to determine LTV ratios. Compare ratios in Q3 2012 and Q3 2022.

During that decade, rates declined in 67 percent (eight) of the markets examined in the report. The largest decreases were observed in London and Moncton with 21 percentage points, Halifax with 15 percentage points and Toronto with 10 percentage points.

The lowest loan-to-value ratios were found in some of the country’s most expensive markets, including Vancouver at 50 percent and Toronto at 53 percent. The highest LTVs were discovered in Regina and Edmonton at 88 percent and 83 percent, respectively.

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The agency notes that three main factors contributed to the downward pressure on LTV ratios over this period.

“Equity gains, the pandemic facilitating the ability to work remotely in smaller markets, and the transfer of wealth between generations, particularly in the second half of the last decade and early 2020s,” the report said.

Elton Ash, executive vice president at RE/MAX Canada, said government action also played an important role.

“The government’s measures to reduce risk to the country’s property markets, including the much-maligned stress test, have also been instrumental in maintaining the overall health of Canada’s market,” Ash said in the report. “The real estate market in Canada has a reputation for stability compared to other international markets and prudent policies are essential.”

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A recent report by CMHC-Equifax Canada confirmed that mortgage defaults have also fallen in most of the country’s markets, with the national percentage now down to 0.14 percent — down from 0.38 percent in 2012.

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Ontario and British Columbia have the lowest default rates at under 0.08 percent.

Data from the same CMHC-Equifax Canada report found that the number of buyers with credit scores below 660 has also fallen dramatically over the past decade. Nationally, that number fell to 4.7 percent in the third quarter of 2022 — down from 8 percent a decade ago.

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“Because interest rates have been so low for so long, many Canadians have paid off a large portion of their principal so that after five years you’ve put a big dent in your mortgage – and I don’t think that’s talked about enough. ‘ Alexander said in an interview.

This has enabled homeowners to deal with the dramatic rise in interest rates they face as their mortgages come up for renewal.

“Chances are that when rates double, you’re paying back a significant chunk and so renew yourself,” he said. “The pain you may feel won’t be as bad as if your interest rate had been higher in the past.”

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