Assessing the Lending Climate During COVID

Real estate has been one of the biggest catalysts of Canada’s economic recovery from COVID-19. Strong pent-up demand, favourable interest rates and a rush to the suburbs have kept home sales and real estate values trekking upward for much of the latter half of 2020. For lenders, however, the pandemic has created a new and unfamiliar environment in which they must evaluate and monitor credit risk.  

Canadian real estate broke sales and price records during the summer, as the market continued to play catch-up following spring shutdowns. The early housing market recovery strongly favoured higher-wage earners and investors who snatched up properties in the suburbs of major metropolitan areas. 

Borrowers whose employment was unaffected by government lockdowns saw their savings surge amid the pandemic. Combined with record-low mortgage rates, the property value that a median household could afford increased by 13% from the same time last year and 24% from 2018. 

The Canada Mortgage and Housing Corporation, CMHC, warned months ago that key segments of the housing market were overvalued. The Crown corporation said it was bracing for further impacts due to the pandemic. Transaction data from September and October suggest the market is either stabilizing or heading for a soft landing, with the latter describing dense urban regions where demand for condominiums has wavered because of declining immigration and shifting workforce trends. Although this is a far cry from the pessimistic scenario painted by economists at the outset of the pandemic, the post-lockdown surge in real estate is beginning to moderate. 

Echoing its earlier warnings about the housing market, CMHC has also asked banks and mortgage companies to lower their exposure to higher-risk mortgages. The agency defined “high risk” as over-leveraged first-time buyers who represent a considerable risk to the economy. 

Lenders have been adapting to CMHC’s guidelines since the summer when new mortgage insurance requirements capping gross debt ratios were first implemented. However, the new guidelines had no immediate impact on transactions as home sales continued to surge. Private lenders, who are not constrained by CMHC guidelines, played a key role in meeting market demand. 

In addition to more stringent insurance and credit-score requirements, COVID-19 caused another domino to fall, this time in the mortgage refinancing market. Long considered to be most vulnerable to contagion, mortgage refinancing deals have become more challenging for traditional lenders who are either unable or unwilling to take on the risk. On the borrower side, demand for mortgage refinancing remains elevated as more people seek financial relief in the form of debt consolidation, home equity, or reduced interest payments. 

Once again, the private sector has played a key role in filling the void left by traditional lenders—albeit with a greater sense of caution than before the pandemic. It’s estimated that private securitization accounts for a healthy 1.1% of Canada’s mortgage funding mix.

Despite COVID-induced uncertainty, Canada’s mortgage market appears to be converging on stability as post-crisis recovery continues. A recent housing market report from Mortgage Professionals Canada (MPC), showed growing positive sentiment among mortgage holders and renters who are considering purchasing a home in the next three years. A combination of lower interest rates and higher incomes continue to have a positive impact on affordability.

Adding to this overall positive sentiment is the fact that mortgage delinquencies of 90 days or more remained extremely low for all mortgage lenders. Against this backdrop, Capital Economics is forecasting home prices to grow 12% from now until the end of 2022. In the meantime, new construction projects for single-family homes continue to grow, mirroring the post-lockdown shift in the workforce.