Mortgage debt is growing at its slowest pace in 23 years — but that could be short-lived, says CMHC

Mortgage debt grew at its slowest pace in 23 years in February, amid high borrowing costs and reservations related to the Bank of Canada’s key interest rate — but the slowdown likely won’t last, according to Canada’s housing agency.

Canadian mortgage debt totalled $2.16 trillion that month, up 3.4 per cent from the same period last year — a historically low growth rate, according to a report from Canadian Mortgage and Housing Corporation (CMHC). 

High interest rates and uncertainty over the central bank’s plan to lower its key interest rate led to fewer home sales and softer prices across many regions. 

Tu Nguyen, an economist with RSM Canada, says it’s not surprising that housing market activity has slowed down.

“Households are really being squeezed by high inflation and high interest rates. It’s also a waiting game, as prospective homebuyers are waiting on the sideline for the Bank of Canada to cut rates,” she told CBC News.

However, she agrees with the agency’s expectation that the slowdown in mortgage growth could be short-lived, with higher home sales and prices forecast in the coming years.

“Once the Bank of Canada begins cutting rates, which is as early as next week, we will see mortgages growing again,” she said. The Bank of Canada’s next interest rate announcement is on June 5.

According to the CMHC’s report, that anticipated decline in mortgage rates, along with population growth and increases in disposable income after tax and inflation, will likely fuel the turnaround.

“In a context where debt levels have never been so elevated and households are showing increasing warning signs of financial struggle, household debt vulnerability is becoming a primary area of concern,” said CMHC deputy chief economist Tania Bourassa-Ochoa in a news release.

“As homeowners find it more difficult to manage their monthly budgets, policymakers and the financial sector are on high alert when considering risks to the financial industry and the economy.”

‘Noteworthy increases’

The report also said borrowers are continuing to opt for shorter-term, fixed-rate mortgages over traditional five-year fixed terms as they remain uncertain of the short- and medium-term mortgage rate outlook.

That’s despite “noteworthy increases” in the discounts being offered by lenders on five-year, fixed-rate mortgages in the first two months of this year, which marked a reversal of the trend from the last half of 2023.

“Lenders are foreseeing potential rate cuts by the [Bank of Canada] occurring sooner than they anticipated last year and are seeking to lock in mortgages at relatively high rates,” the report said.

Terms ranging from three years to less than five years remained the most popular choice, representing nearly 40 per cent of all lending for newly extended mortgages in February 2024. Variable-rate mortgages accounted for 15 per cent of all lending for newly extended mortgages.

The report showed the national mortgage delinquency rate hit 0.17 per cent in the fourth quarter of last year, still near historic lows, but trending up for the first time since the beginning of the pandemic.

Low delinquency rates don’t necessarily mean that households are in a good spot financially, Nguyen said.

“People pay their mortgages first and foremost. So they pay their mortgages before they pay for anything else, like eating out or sports or vacations.”

The report also noted the Big Six banks are taking an increasing share of the market for extended mortgages.

In the fourth quarter of 2023, those banks’ share grew 11.8 percentage points from last year, driven by increases in refinances and renewals. Other chartered banks and credit unions recorded decreases of 6.9 and 3.1 percentage points, respectively.