Six-month mortgage deferrals for borrowers struggling with the financial impact of the novel coronavirus pandemic will be over for many in the fall. How many of those deferrals will turn into defaults is one of the questions hanging over the future of Canada’s economic recovery.
Around 2.6 million Canadians, or just over nine per cent of credit consumers, have at least one active deferral, according to a recent survey by TransUnion Canada. Of those deferrals, 28 per cent are mortgages, the report also shows.
As of the end of June, some 760,000 Canadians, or about 16 per cent of mortgage holders, have taken advantage of mortgage deferral options rolled out by banks since the middle of March.
How many of those homeowners will be able to keep up with their bills when the payment vacation ends is something policymakers, investors and economists will be watching closely.
“The numbers are looking better than they are in the economic data and also the corporate earnings because there’s so much government intervention,” says Gregory Taylor, chief investment officer at Purpose Investments.
“It will be interesting to see how things really are there when you take the training wheels off,” he adds.
Those training wheels include federal income support programs like the Canada Emergency Response Benefit (CERB) and the payment deferrals, which, while offered by private financial institutions, have been aided by a variety of crisis policy measures.
When it comes to the end of the mortgage-payments grace period, there is no consensus on what the future holds.
In May, Evan Siddall, president and CEO of the Canada Mortgage and Housing Corporation (CMHC), spoke of a mortgage deferral “cliff” looming in the fall, when some jobless homeowners would have to start making payments again.
“As much as one-fifth of all mortgages could be in arrears if our economy has not recovered sufficiently,” Siddall warned.
Mortgage expert Robert McLister, on the other hand, sees more of a “deferral ditch.”
But many borrowers appear to have taken advantage of payment vacations not out of financial necessity but to build an emergency cash buffer, McLister says citing conversations with lenders. Others will be able to tap their lines of credit to continue making their mortgage payments, he adds.
It helps that home prices have generally held up or risen in much of Canada since government restrictions linked to COVID-19 began to loosen up. On average home prices were up a whopping 14.3 per cent in July compared to the same month last year, according to the Canadian Real Estate Association.
The strong real estate market also means homeowners who can’t keep up with payments after the end of the deferral period will have an easier time putting their properties on the market, McLister says.
“There’s definitely going to be an increase in (the housing) supply,” he says.
But if the housing-market rebound bodes well for Canada’s chances of dodging a massive spike in defaults, record-high household debt is a significant vulnerability.
“The potential for a trigger event to occur when household debt is high has long been cited as the biggest risk facing Canada’s financial system,” a recent Bank of Canada analysis notes.
The research, which dates back to June, finds that one in five households has enough financial buffers only make just two months of mortgage payments and about one-third can make up to four months of payments. In other words, without a regular income, many homeowners wouldn’t last long.
Mortgage deferrals and programs like the CERB help keep financially stretched homeowners afloat while the labour market recovers from the impact of the lockdown, the researchers note.
It’s unclear how much longer borrowers will be able to rely on those two buoys.
On Aug. 20, the Trudeau government announced a $37-billion package to prolong the CERB by another four weeks and bolster support for workers affected by COVID-19 once the emergency benefit runs out. The new measures include broad changes to Employment Insurance and the creation of three new benefit programs.
A degree of uncertainty, however, surrounds the future of the new measures, as Prime Minister Justin Trudeau has prorogued parliament until Sept. 23 following the resignation of Bill Morneau as federal finance minister and the WE Charity scandal.
Sources who have been briefed on the government’s plan say the new income supports will be created through regulations, rather than legislation, the Canadian Press has reported.
When it comes to mortgage deferrals, some lenders have said they’ll work on a case-by-case basis with borrowers who can’t resume regular payments.
The other key variable to watch is the speed at which the labour market will heal, the Bank of Canada researchers note.
Since May, the economy has recouped around 1.7 million of the roughly three million jobs it lost in March and April amid mandatory business and school closures.
But after a strong partial rebound, the pace of the recovery seems to have stalled a bit, Taylor says. And there could be setbacks, he warns, such as the arrival of a second wave of COVID-19 cases.
There’s also a risk that, as companies stick with a work-from-home model for longer, “they’ll probably realize they don’t need everyone to come back,” Taylor says.
“The fall is going to be really interesting.”