Here’s a picture we came across today of mortgage arrears north and south of the border. (Click to enlarge)
The chart is from a recent Bank of Canada presentation. While the data seems slightly dated, it’s notable that U.S. prime mortgage arrears are over three times the rate of Canadian subprime arrears.
(Chart source: Bank of Canada)
Mortgage arrears are a lagging indicator for the health of a housing market. Home prices need to fall first and stay at levels below the peak prices in order for forclosure levels to climb. Unless we see a continued turnaround in Calgary prices for example we will continue to see a sharp rise in foreclosures peaking in 2012 (5 years after market peak).
A comparison to U.S. in this light is only to show our fall in home prices is lagging the U.S. (prices are at records in Canada of course, though this will be a temporary condition).
Isn’t the definition of arrears different between the U.S. and Canada ?
Isn’t it possible to simply walk away from a mortgage in the US, while in Canada (Alberta aside) you cannot?
May I ask what you are basing your “sharp rise in arrears” statement upon? Do you have data to support your claim?
Arrears are linked much more closely to employment than housing prices.
Even if arrears rose 100% in Canada they would still be minute by international standards.
In the USA arears are counted when a mortgage is 30 days plus late, in Canada its 3 months.
The Mortgage Bankers Association measures both 90 day and 30 day delinquencies in the US. The 30 day figures are a leading indicator of 90 day delinquencies, which are considered “serious” arrears.
http://www.mbaa.org/NewsandMedia/PressCenter/71891.htm
Alberta arrears data:
http://edmontonhousingbust.com/files/100330-1.jpg
Agree that employment plays a role in arrears.
The graph you’ve shown for the U.S. however shows that arrears climbed sharply after prices began declining in 2005 and well before employment climbed sharply in 2008/2009.
Also, I’d suggest people should find little comfort in our low level of arrears. Your graph shows that many multiples of a 100% increase can happen in a short time.
I apologize if I’ve mistakenly attributed this blog post to peter.
I agree with ALE: The US peaked in 2005, Canada peaked in 2007 (and/or again in 2010).
These stats will be meaningful 5 years after the peak: maybe 2015
Also – keep in mind that 0%/40-yr mortgages were available in 2006-2007. The resets on all of these mortgages will be coming in 2011-2012, so the data may start to change then.
Rob, can you provide the link to the original Bank of Canada presentation? I found a slightly older version of the graph in one presentation from 2009, but didn’t find the latest version you posted.
Eug, are you asking about the CBA arrears charts below?
http://cba.ca/index.php?option=com_content&view=publication&id=69&Itemid=56&lang=en
Hi Eug,
Here it is….
http://www.bankofcanada.ca/en/speeches/2010/presentation_070410.pdf
Cheers,
Rob
Thanks guys.
As far as mortgage arrears, are they really measuring the same thing? See above comments from the other posters.
I agree with Peter 100%!!
Hi Eug,
Yes sir, the data is comparable. The Bank of Canada is pretty good at matching up apples to apples!
Cheers,
Rob
To say Canada is at risk of multiple 100% increases in arrears is like saying Canada’s housing market is like the American’s. Nothing could be more innacurate. There are too many differences to list every one. However, anyone who is informed knows the main distinctions. Canada has decidedly stronger underwriting standards, lower LTVs, a relative absence of subprime lending, and a far more transparent securitization system. To make informed judgements on Canadian defaults requires one to fully understand the causes of arrears, a history of arrears in Canada, and the above characteristics of Canada’s lending environment.
It’s different here, until it’s not.
I look at fundamentals like home price to income ratios, consumer and mortgage debt levels, and price to rent ratios and see levels that match and exceed 2006 U.S. pre bust.
As for the stronger underwriting, lower LTV’s and absence of subprime there is plenty of information available to suggest that we’re in bad shape. Even if we weren’t prices need to drop in order for fundamentals to come back in line and if they do arrears will climb steeply (as they have started to in some areas already – like Alberta where home prices are below peak levels.
Take care, ALE.
Here’s an interesting article supporting the statement I made around subprime.
http://www.vancouversun.com/business/fp/Subprime+mortgages+alive+here/2784846/story.html
ALE
Look at arrears data after Canada’s last bubble burst in 1989. Prices collapsed 25% and arrears were less than 1%! In the early 80s prices sank 40% in some markets. Still, arrears were just 1%.
All this chatter about bubbles, Canada’s subprime mess, and mass defaults is wild and unfounded hype. It may be well intentioned but it is hype nonetheless.
Wild yes, but not unfounded.
There is plenty of information available outside of the msm and realtor press releases that suggest worries of a bubble are founded.
Unfortunately there are very few in the real estate business, including the mortgage business, who are incentivized to warn of the dangers. Beyond the moral hazards the CMHC the real estate biz is founded on commissions. This effectively making everyone involved a salesperson. The net result is that a generations of Canadians have been sold on the idea that your primary residence is an investment not a shelter. When you’re paying 2x rent for a primary residence you’re a speculator and we know where speculation leads.
Even if someone can continue to pay their mortgage and not default, it is a bit of a problem when prices fall that much and put people upside down on their mortgages.
Also: Variable rate mortgages were not avaialbe in Canada during the 1980s. So, people did not expereince increases in their payments. Nowadays,if interest rates go up, many people’s payments go up. It will be interesting to watch…
We’re not debating whether negative equity is a “problem”.
The question is whether Canada is at risk of unusually high foreclosures. I for one have never seen anyone make a good case for that.
By the way, where did you get your facts about variable mortgages? There were definitely variables back in the 80s. My grandfather had one as a matter of fact.
Yah..likely my mistake on that one…I “thought” I read it and didn’t get back to posting when I couldn’t figure out where exactly…