Deferral Cliff Update

Steve Saretsky -

Second quarter data confirmed Canadian GDP plunged by an annualized 38.7%, officially the worst quarter on record. Household consumption plunged by an annualized 43%, housing investment sank 48%, and non-residential business capital spending was down 57%.

Despite this, the housing market continues its torrid pace, defying the laws of economic gravity. It probably helps that disposable incomes were actually up 14%, and household savings rates surged 28% as CERB cheques flowed into household bank accounts and mortgage payments were paused for virtually anyone who asked.

While income support is poised to continue as CERB morphs into an expanded EI program, it appears mortgage borrowers will be asked to resume payments later this fall as deferrals expire. With that in mind, let’s take a look at the upcoming deferral cliff, as eloquently named by the CMHC.

According to CMHC, deferrals remain elevated for their insured mortgage book. As of the most recent July data, deferral rates by province are as follows:

– Alberta 21.0%
– Saskatchewan 14.8%
– Newfoundland 14.8%
– British Columbia 11.1%
– Ontario 10.1%
– The 3 territories 9.9%
– Nova Scotia 9.9%
– Manitoba 9.6%
– New Brunswick 9.3%
– Prince Edward Island 8.4%
– Quebec 5.6%

Meanwhile, according to Genworth, Canada’s largest private mortgage insurer, The outstanding principal balance of insured mortgage loans reported under the payment deferral program totaled $28 billion, or approximately 14% of outstanding insured mortgage balances as at June 30, 2020. Regionally, mortgage deferrals were primarily driven by Alberta ($8.8 billion) and Ontario ($9.7 billion).

And lastly, recent earnings reports from the big six Canadian banks reported mortgage deferrals of 13.5% in the three months through July, down slightly from a peak of 16%.

In other words, mortgage deferrals remain elevated, and a real cause for concern. Unless our banking regulator OSFI allows mortgages deferrals to be extended, it appears recent momentum in the housing market will be put to the test towards the end of the year. Until then, housing sales should continue to outpace new listings.

Three Things I’m Watching:

1. Gross domestic product plunged by an annualized 38.7 per cent in the three months through June.

2. Household savings rates surged higher thanks to Government hand-outs.

3. Permanent resident arrivals in Canada dropped to 34,000 in Q2, down 67% from the same quarter last year.

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