Wage subsidies and debt payment holidays have done a fine job in covering up the perils of bloated household balance sheets. According to recent Government data, households lost a combined $21-billion in employment compensation in the second quarter, but they gained $54-billion in government transfers. In other words, disposable incomes were up nearly 11% and savings rates surged by 28%. It turns out life is pretty good when you don’t have to pay your bills and the Government strokes a cheque to sit at home.
That’s certainly keeping the housing market steady. Home sales across Greater Vancouver enjoyed a 37% increase in August when compared to last year, as buyers look to enhance their living standards amidst what is, at least on paper, the worst recession in living memory. The surprising strength of the market is creating a self-enforcing positive feedback loop that is reminding buyers that even in the worst of times nothing can interrupt a multi-decade real estate bull market, not even a pandemic.
However, it’s not all rainbows and butterflies. While the Trudeau Government remains committed to ensuring wage subsidies continue to flow, it appears OSFI, the Canadian banking regulator is ready to pull the plug. The debt payment holiday will be coming to an end, as OSFI has officially stated it will not be extending mortgage payment deferrals. Loan and payment deferrals granted after September 30 will not be eligible for special capital treatment.
With over 16% of all mortgages at one point or another being in deferral, we will soon get a better glimpse behind the curtain as to who really needed the deferral, and who didn’t. While I am personally of the view that the deferral program was abused, just like CERB, it only takes a small percentage of borrowers to upset the apple cart.
According to National Bank Financial banking analyst Gabriel Dechaine, “If you assume 90 per cent of the borrowers deferring payments go back to normal and 10 per cent become impaired [i.e., likely won’t ever pay], you could see the arrears rate get close to 2 per cent. The type of scenario needed to get you there is a W-shaped recovery and another full lockdown of the economy.”
Dechaine adds, more likely, the slow recovery will result in closer to 5 per cent of mortgage deferrers defaulting, he suspects. That could lift the 90-day arrears rate from 0.24 per cent to 0.9 per cent or 0.95 per cent. That’s not far off the Bank of Canada’s “pessimistic” scenario projection of 0.8 per cent for the second half of next year.
To put that in context, in the early 1980s we saw just over 1 per cent of mortgage borrowers go into arrears, also known as 90-day delinquencies. That’s the highest Canada has ever seen to date.
That could obviously spill over into more inventory hitting the market, perhaps disrupting the great bull market. Although it’s important to re-iterate that this is merely an educated guess.
For now, it’s a great story, Canadians are statistically speaking, better off today than they were six months ago, at least financially. Who could have imagined.
Three Things I’m Watching:
2. Detached house sales in the Fraser Valley surged 53% compared to the same period last year. Compare this to an investor based condo market in Downtown Vancouver which saw zero sales growth during the same period, and an 80% increase in New Listings.
3. Jobs are recovering, but the unemployment rate still sits at 10.2%.