Canadian real estate is starting to see the first sign of stress from higher interest, and normalized demand. Canadian mortgage lenders are beginning to write off larger mortgages in Q3 2022—the largest in nearly a decade. Credit bureau data shows this isn’t a problem yet, as the share of mortgages written off continues to fall. Fewer new borrowers and shrinking liquidity likely means the declining rate is just a lag.
Mortgage Loan Losses Are About Liquidity, Not Borrower Health
There’s a lot of misconceptions around losses and low default rates, so let’s quickly address this issue. Loan losses indicate a lack of liquidity, not necessarily borrower health. In a booming market, anyone will buy anything at any price, and that means a borrower struggling can sell before defaulting. A seller needs to be forced to sell and unable to find a buyer at the price they need for an increase in losses. Low default rates are more indicative of a bubble than anything, whereas small increases aren’t necessarily a bad thing.
Canadian Mortgage Loan Loss Size Surges 68% Higher
Canadian mortgage losses are making an abrupt climb higher these days. The average loss reached $96,000 in Q3 2022, up 17.1% ($14,000) from the previous quarter. This is a whopping 68.4% (US$39,000) higher than the same quarter last year. Losses are taken after the value of the home is included, so they tend to shrink as home prices rise. The last time it was this high was all the way back in 2015, so…
