Mortgage defaults are expected to rise in the wake of a deteriorating job market, says DBRS Morningstar.
In a new report that examines conditions in the Canadian housing market, the rating agency reported that residential mortgage growth was strong to start 2020, and was up 6.0% on an annual basis as of May.
While a variety of policy measures have been introduced to shore up market liquidity and keep credit flowing in the face of the Covid-19 outbreak, DBRS said that it “expects mortgage growth to decelerate significantly in the short term.”
Additionally, changes to the rules for insured mortgages that took effect on July 1 “will make it harder for the average family to qualify for an insured mortgage,” the rating agency said.
In terms of defaults, DBRS said that the credit quality of residential mortgages “is highly correlated” to local employment and housing market conditions. Rising unemployment and weaker house prices are both tied to rising defaults.
“Layoffs and lower income for hourly paid employees and for people who have been quarantined will put many households in financial hardship,” DBRS said.
DBRS said that it expects “significant economic contraction” for Canada this year, with the higher unemployment rate “remaining elevated for the next two years as the economy recovers.”
This, in turn, is expected to drive an increase in mortgage defaults, even as the big banks, other large lenders and the government have provided payment holidays and other measures designed to help troubled borrowers.
As for housing markets, sales started the year on a strong note, but plunged by 57.3% in April, and remained down by 34.7% in May, DBRS said.
While sales are expected to rebound as the economy begins to reopen, “there is still a great deal of uncertainty around the length of time it will take to recover as Canada works toward preventing a second wave of coronavirus cases,” DBRS cautioned.
Additionally, trends such as weaker immigration, intensified household financial stress and more stringent mortgage insurance requirements “might affect housing demand in the longer term,” the rating agency said.
At the same time, high household net worth will provide less of a cushion than it has in the past.
“Net worth as a percentage of disposable income decreased to 837% in Q1 2020 from 879% in Q4 2019, as the liquidity pull back in the equity markets affected global wealth,” DBRS reported.