Vancouver is often cited as one of Canada’s most vibrant housing markets. But beneath the pulsing activity and soaring demand lies some unsettling news compiled by betterdwelling.com over the weekend.
According to the findings, “The quality of mortgages [in Vancouver] are showing increasing signs of quality deterioration.”
The report points to a pair of trends that combine to expose a vulnerability facing the market. The first of these trends is known as high-ratio mortgages. This is defined as a mortgage in which “less than 20% is placed as a down payment, and the owner has as little as 5% equity in the home.”
The second trend is high loan-to-income ratio mortgages, which is “the ratio of the size of the mortgage (the loan) to your gross annual salary (income).” Carrying a mortgage with a high ratio makes it difficult to keep up with payments, and would be outright dangerous if a slight market correction leads to even a small increase to interest.
When a mortgage is defined by both of these traits, there is a stronger than usual chance that the mortgage will go underwater, and that the holder will not have the means of recovery. This has the potential of leading to a situation in which the homeowner is forced to sell their stake in the home without profiting or even recovering their investment.
According to the Better Dwelling report, which compiles data dug up by the Bank of Canada and the Ministry of Finance, the year ending in quarter three of 2016 had high-ratio mortgages carry an average loan-to-interest rate of over 350% in more than 75% of the postal codes. The ratio represents an 11% increase from the prior period, which is a substantial uptick. As the Better Dwelling report points out, “This isn’t the good kind of increase.”
The concerns surrounding the Vancouver market are unfortunately not local. The Toronto housing market it showing similar signs of vulnerability. If interest rates increase, both cities are likely see numerous homeowners negatively affected.