Summer of 2025 to winter of 2026 will be a testing time for the Canadian economy given the confluence of multiple headwinds.
Mortgage renewal cliff:
- $1.56 Trillion worth of mortgages renewing with accumulated unpaid interest of >~$300B
- $1.1T of these are uninsured and taken out at peak of valuations in 2020 and 2021
- Ideally, they have to pay back the unpaid interest or increase the mortgage payments on renewal, which if it happens, will cause a huge consumption shock by diverting expenses towards these repayments
Increasing Arrears and Consumption Shift Towards Shelter Costs
- Arrears on leading indicators like auto loans and credit cards increasing and back to 2019 levels, indicating drying up of COVID savings
- In Q4 2023, mortgage delinquency rate was up 135.2% in Ontario and 62.2% in B.C. — although from a low base
- Household operations and furnishings are now disinflationary (-2.1%), and recreation inflation is at 1%, indicating that demand has fallen significantly in these areas, pushing prices down or to stagnate
- This shows a shift in consumption, with households cutting non-essential expenses to keep up with shelter costs (+6%) and food costs (+2.3%)
- Business insolvencies increased by 129.3% in Jan 2024 compared to Jan 2023, with higher increases in food, retail, and construction (not a coincidence)
Foreign Capital, Immigration Reduction, and Investor Sentiment:
- Between 2016–2022, Canada had $225B in capital outflows — 3X that between 2010–2015
- Capital inflows had kept the deficit manageable, but much of it was in real estate. At its peak, 40% of buyers were investors — many from outside Canada. This investment and capital flow now face headwinds given macro factors in China and the Pacific
- Given the higher neutral rate, the depth and speed of interest rate cuts will be shallow, thus leaving pressure elevated; longer durations of lower returns for investors and higher pressure for occupant owners will turn sentiment and push inventory into the market
- Credit unions and non-bank lenders have a high % of their assets exposed to real estate. Take a large West Canada credit union, for example: out of $28B in assets, $24B is tied to real estate and construction loans
Two changes recently made can support the digestion (albeit one that is borderline unethical and illegal):
- 30-year mortgages are now legal for insured mortgages
- Under the Canadian Mortgage Charter, banks are now required to support “longer amortization for as long as necessary,” effectively making indefinite mortgages legal
Despite these measures, the strain is too high on the financial system and real estate market. While it might hold up for a little longer, it will come at the expense of reduced consumption elsewhere, eventually creating a drag.
There is still a structural shortage, which will support the housing market, but the consumption shift — accompanied by the headwinds of payment shock, reduced foreign capital inflow, and reduced credit capacity — can stagnate the economic engine, if not cause it to crash, eventually impacting asset prices too.
