Canadian consumers will face previously unheard-of levels of debt in the coming months as households grapple with shrinking incomes and mounting bills, the head of Canada’s government-run mortgage insurer says.
There were virtually no silver linings in Evan Siddall’s testimony to the House of Commons finance committee Tuesday ― testimony Conservative MP Pierre Poilievre described as “bloody terrifying.”
One in eight households with a mortgage have deferred their payments, and that could rise to one in five by September if the economic recovery disappoints, Siddall ― CEO of Canada Mortgage and Housing Corp. (CMHC) ― told parliamentarians.
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Canada lost more than three million jobs in March and April amid the COVID-19 lockdown, and the total number of hours worked shrank by nearly 30 per cent.
Canada’s major lenders put in place programs allowing mortgage borrowers to defer payments for several months. Those deferrals are set to expire in the fall.
The Canada Emergency Response Benefit (CERB), which provides $2,000 a month for up to 16 weeks for those who lost work in the pandemic, will also expire around that time, if it isn’t extended.
“A team is at work within CMHC to help manage a growing debt ‘deferral cliff’ that looms in the fall, when some unemployed people will need to start paying their mortgages again,” Siddall said.
A key measure of how well households can handle their debt will hit its worst level on record, CMHC predicts. That’s because unpaid bills are piling up even as households are seeing lower incomes.
The ratio of household debt to disposable income will rise to “well above” 200 per cent ― possibly as high as 230 per cent ― before starting to decline. The highest it had ever been before was 178 per cent, several years ago at the height of the house-price explosion.
“Almost everything we’ve done in response to the crisis involves borrowing,” Siddall said. “Just as governments are taking on more debt … mortgage deferrals (are) adding to household debt.
“The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s long term financial stability.”
“Almost everything we’ve done in response to the crisis involves borrowing.”
CMHC sees house prices in Canada falling between 9 per cent and 18 per cent over the next 12 months. Siddall warned that first-time homebuyers who are early into their mortgages could find themselves underwater ― meaning their mortgage could be larger than the market value of their house.
“Unless we act, a first-time homebuyer purchasing a $300,000 home with a 5 per cent down payment stands to lose over $45,000 on their $15,000 investment if prices fall by 10 per cent,” Siddall said.
He noted that, as the underwriter of a majority of insured mortgages in Canada, CMHC will be on the hook for paying off banks’ bad mortgages ― which he estimates could cost some $9 billion in this crisis. Siddall said the CMHC is looking at pulling back on its underwriting of home lending ― a move that could potentially reduce Canadians’ access to mortgages.
“Housing demand is far easier to stimulate than supply, and the result we have seen is Economics 101 ― ever-increasing prices,” Siddall said.
“So if housing affordability is our aim … then there has to be a limit to the demand we create especially when supply isn’t keeping up.”
CMHC’s support for the housing market “cannot be unlimited. It’s like blood pressure. You can have too much. You need some,” Siddall said.