Summer of 2025 For Canada
This was originally posted in April 2024 on our LinkedIn channel.
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% and 62.2% in Ontario and B.C although it was from a low base
Household Operations and Furnishings are now disinflationary (- 2.1%) and recreation inflation is at 1% indicating that is where demand has fallen significantly pushing prices down or to stagnate. This shows the shift in consumption and that households are cutting the 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 in last 6 years; 3X that between 2010-2015
Capital inflows kept the deficit manageable but many of it was in real estate. At its peak, 40% of the buyers were investors - many from outside Canada. This investment and capital flow faces headwinds given the macro factors in China, Pacific.
Given the higher neutral rate - the depth and speed of cuts will be shallow thus leaving the pressure elevated; Longer durations of lower returns for investors, and higher pressure for occupant owners will turn the sentiment and push inventory in the market
Credit unions and non bank lenders have 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 in 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 and 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 headwind of payment shock, reduced foreign capital inflow, reduced credit capacity can stagnate the economic engine if not cause it to crash eventually impacting asset prices too.