CAAMP has published a report on 40,000 mortgages from 2009 titled  Revisiting The Canadian Mortgage Market – Risk is Small and Contained, in which it comes to the conclusion that claims that Canadians are taking out risky variable-rate mortgages and borrowing more than they can afford “are not based on actual data” and “are misinformed.”

The study begins by pointing out that as of October 2009, there was $952 billion of residential mortgage credit outstanding in Canada. This was about 60% higher than just five years earlier, representing a growth rate of 10.0% per year. This growth rate was far in excess of growth of incomes and therefore mortgage debt has become a growing burden for Canadian households.

During the recession housing activity slowed and there has been a corresponding deceleration of the growth rate for the mortgage market. As of October 2009, the annual growth rate was 7.1% (an expansion of $63 billion). Growth of mortgage credit has slowed compared to prior years, but remains quite robust.

Rapid growth of mortgage credit has two principle causes:

1. Increasing housing prices. During the past five years the average selling price in Canada has increased by an average of 7.8% by year, and average mortgage amounts have increased.
2. Since the late 1990s there has been a profound shift of Canadian households into home ownership. As of 1996, the Census found that 63.6% of Canadian households were home owners. By 2006, the share had increased to 68.4%. Today, the share is close to 70%. Most new home owners require mortgages and therefore the number of mortgage holders has increased very rapidly, from 3.54 million in 1996 to about 5.425 million today, an increase of almost 2 million. This tenure shifting from renting to home ownership accounts for at least one-half of the growth of Canadian mortgage credit.

This data certainly gives rise to a question of whether Canadians are taking on too much mortgage debt. But, the data already shown – that a large share of the growth in debt is due to an epochal shift from rental tenure to home ownership – is our first reason to reduce our concerns, so long as Canadians are being prudent. And, the data shown below says that they are.

Despite rising home prices, first-time mortgagors took out “far less” than they could afford last year, says CAAMP.

“The vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates in to their mortgage decisions,” stated Jim Murphy, president and CEO of CAAMP.

CAAMP ran simulations to estimate what would happen if the Bank of Canada hiked rates 3% over two years (and fixed rates rose 1.25%).

It found that income gains should offset much or all of the increases in mortgage payments that most Canadian’s would experience.

“The bottom line from the simulations is that even though mortgage payments will probably rise for most borrowers, the increase in their incomes will more than offset the higher payments,” said CAAMP chief economist Will Dunning. “All in all, the degree of risk from rising mortgage rates appears to be small and manageable,” he writes.

A key finding in the report was that 86% of Canadian home buyers took out fixed rates in 2009.  Here’s a breakdown of the terms they selected:

• 5% chose 1- to 2-year terms
• 20% chose 3-year terms
• 5% chose 4-year terms
• 70% chose 5- to 10-year terms

Other notable findings from the study:

• 5%: Number of Canadian households who purchase a home each year.
• 50-60%: Number of those who are first-time homebuyers.
• 0.03%: Percentage of first-time home buyers (compared to all home owners) that are “pushing the envelope” by getting mortgages they may not be able to afford.CAAMP estimates these “at-risk” borrowers amount to 4,000 households out of 13,250,000 in Canada.
• 10%: Annual growth rate of mortgage debt in the last five years.

”This growth rate was far in excess of growth of incomes and therefore mortgage debt has become a growing burden for Canadian households,” CAAMP said.

CAAMP attributed this growth to rising home prices and increased home ownership. 70% of households now own homes, versus 63.6% in 1996.

• 5.425 million: Number of Canadian mortgage holders.
• 22.3%: Average GDS ratio of a home buyer in 2009
  
  32% is the traditional GDS maximum. This stat is a pleasant surprise. According to CAAMP’s findings, most Canadians appear to be underbuying, not overbuying–as some critics charge.
  
• 32.8%: Average TDS ratio of a home buyer in 2009Similar to GDS above, this is well below the standard. 40-42% is the typical TDS maximum.
• 0.44%: Current percentage of mortgage holders in arrears.CAAMP says arrears averaged 0.50% in the 1990s. Mortgage arrears are highly correlated with Canada’s employment rate. Reduced hours/pay and separations/divorce are secondary factors. CAAMP says it “appear(s) most likely that the arrears rate is close to peaking.”

Dunning closed the report by writing:

“No harm can be done by reminding Canadians to be prudent in borrowing money.
But… Virtually every Canadian who is in a position to buy a home and qualify for a mortgage is well-educated and capable of assessing what is in their best interests, of looking forward, and of anticipating threats to their financial well-being.
The Canadian mortgage lending industry is amply incentivized to avoid making bad loans and to optimize risk exposures.
This research on the characteristics of recent mortgage transactions suggests very strongly that current rules and practices are resulting in an acceptable level of mortgage related risks in Canada.”

About CAAMP

CAAMP is the national organization representing Canada’s mortgage industry. With over 12,000 mortgage professionals representing over 1,600 companies, its membership is drawn from every province and from all industry sectors.

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Tags: Bank of Canada, mortgage, Rates, Risk