While September was an otherwise busy month for real estate activity across the country, RBC Capital Market analysts say between up to 20% of mortgages currently under deferral are at a higher risk of default.
In a recent report, RBC analyst Darko Mihelic and senior associate Sanly Li wrote that while Canadian real estate will be able to make it through COVID-19, between 10 and 20% of mortgages are at risk of deferring,
But what's more of concern is the analysts fear that borrowers on a deferral program, who are currently unemployed (and were receiving the Canada Emergency Response Benefit, or CERB) and borrowers on a deferral program who are employed but are earning less than what they earned pre-COVID, are most at risk.
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“We are also concerned about borrowers not on a deferral program but are facing some form of financial hardship," wrote the analysts.
They went on to say that if 20% of mortgages under deferral eventually become delinquent in the country, it will equate to a mortgage delinquency rate of 2.3%, which is almost four times higher than the peak Canadian mortgage delinquency rate over the past 30 years.
"However, we have reasons to be optimistic that this high level of default will not occur,” added Mihelic and Li.
Currently, 11% of mortgage borrowers from large Canadian banks representing around $175 billion of mortgage debt are not making payments, according to RBC.
However, additional government support -- like the revamped Employment Insurance program and other government benefits for businesses -- should ensure that these possible defaults don't occur. The analysts said these financial aid programs should ensure the economy continues pushing forward and that Canadians won't be at risk of losing their homes.
But, what's important to note, is the analysts fear the mortgage default problem could resurface after another six months when the benefits go away, making impairments an important discussion for banks in the second or third quarter of 2021.
“When thinking of reserves in total, it is important to also remember that bank reserves were originally calibrated to worse economic conditions with lower expectations of help from the Canadian government,” the analysts wrote. “There are many signs that suggest the current environment is far better than last quarter.”
What's more, the analysts say Canadians have also reduced their credit card balances by around $87.1 billion by the end of the third quarter, while their household savings rate had jumped to 28% by the second quarter of 2020, versus 3% during the same period last year.
The RBC analysts estimated that each applicant of CERB has received $8,981 of benefits on average, giving them a fiscal buffer to ensure they can continue to make their mortgages payments.
“We believe during the deferral period borrowers likely have saved up 4 to 6 months of mortgage payments,” wrote the analysts.
“We calculate the average size of a deferred mortgage to be $293,000 using the number of mortgage deferrals and the total deferred balance in Canada for the large Canadian banks. If we assumed an interest rate of 2.95% (based on the average 5-year fixed rate over the past five years) and a 25-year amortization period, we calculate an average mortgage payment of approximately $1,400 per month.”
As for insolvencies, the Office of the Superintendent of Bankruptcy Canada says they fell 42.4% in August compared to August 2019, consumer insolvencies fell by 42.% while business insolvencies decreased by 25.5% during the same period.
This comes as job numbers released on October 9 revealed employment in Canada rose by over 378,000 jobs in September -- which could further help ease concerns about debt levels in the country.
According to Statistics Canada, the country gained 378,200 jobs, lowering the jobless rate to 9%.
