12/17/2019 15:22 EST

Canada’s Mortgage Market Headed For Historic Slump, Fitch Predicts

Prices are too high, and then there's that stress test...

Natee Meepian via Getty Images

MONTREAL ― Government policies and historically high house prices will push Canada’s mortgage market to its weakest growth levels in four decades in 2020, credit rating agency Fitch says.

House prices nationwide will grow at a tepid one per cent in the next two years, but adjusted for inflation, prices will actually fall, analysts said in a forecast issued Tuesday.

The mortgage market, which has grown strongly through good times and bad for decades in Canada, will slow to just one-per-cent growth, the forecast predicted. That’s the slowest annual pace since a 1982 slump in the mortgage market, when interest rates were at all-time highs.


Bank of Canada/HuffPost Canada
This chart shows the percentage change in the value of mortgage debt in Canada. The only period on record when it has shrunk was in 1982. Fitch predicts mortgages will grow just 1 per cent in 2020, the slowest pace since the 1982 slump.

This time, Fitch predicts it won’t take anything near record-high mortgage rates to push the market into a slump.

A perfect storm of new government regulations and house prices that have reached their “affordability limit” will keep Canada’s housing markets in check, said Susan Hosterman, a senior director for North American securitized mortgages at Fitch.

The mortgage stress test ― which requires homebuyers to qualify for a mortgage at a rate two percentage points higher than the one being offered ― means “people have to save longer for a down payment. Meanwhile, prices just keep going up and up,” Hosterman said.

Watch: All the ways Canadians and Americans are now totally different from each other, financially. Story continues below.


Fitch’s forecast is somewhat more gloomy than the ones put out recently by industry groups and real estate brokerages. Those forecasts largely call for an acceleration in sales and prices next year, thanks to falling mortgage rates since the spring of this year.

There will be a “slight increase” in mortgage payments not being made, Fitch predicted.

Debt pressure building

With household debt levels near record highs in Canada, many consumers have little breathing room for additional expenses or an increase in interest rates. Canadians now typically spend 15 per cent of their take-home pay on debt payments, the largest share on record.

The country has seen a spike in consumer insolvencies in recent months, with Ontario households the most heavily impacted.

The Fitch reported also called Toronto and Vancouver ― along with Dallas, Las Vegas and Phoenix, Ariz. ― “the most overvalued cities, with home prices vulnerable to shocks.”

However, in the long run, Fitch sees strong fundamentals holding up Canada’s housing markets.

“There is high demand for housing (thanks to a) push for immigration into Canada,” Hosterman said, noting some new arrivals “buy homes immediately.”

The length of time needed to build housing in Canada has grown because of increasingly tough approval processes, Hosterman added, reflecting a common complaint among developers.

Additionally, “supply issues” ― such as limited availability of residential zoned land around Toronto and Vancouver ― will keep housing costs high, Hosterman predicted.

Governments are trying to reform approvals processes to speed things up, “but the supply can’t keep up with the demand,” she said.