How Is Home Affordability a Problem – Mortgage Borrowing Rises

Mortgage borrowing is on the rise, but private lenders are finding themselves making risky real estate investments. Find out more as home affordability continues to be a problem for Canadians, even for those on the top percentile.

Latest on Canadian Real Estate Market Trends by Steve Saretsky

Per Bloomberg, the “top 1%” is the symbol of wealth and power thanks to a protest movement. Since Occupy Wall Street popularized the term almost a decade ago, inequality has surged, and this exclusive group has only gotten richer and more influential.

Indeed, the top 1% covers a wide span, from prosperous professionals to billionaires with more wealth than many nations. And the difficulty of making the cut varies greatly depending on where you live. To join the exclusive club in Canada, it requires an annual income of $201,000 USD.

While many may aspire to reach the top percentile, those who ultimately succeed may be disappointed with the perks of said exclusive membership. With home prices showing few signs of delivering affordability, particularly in the cities of Vancouver & Toronto, homeownership remains elusive even for the top income producers.

That hasn’t stopped Canadians from trying to keep up. Mortgage borrowing has accelerated, now growing faster than it did before the B-20 mortgage stress test. For those with inadequate incomes, private lenders are stepping in to fill the void.

Alternative mortgage companies are increasingly providing riskier loans, a new report from the national housing agency says. Among large mortgage investment corporations and mortgage investment entities, the percentage of first mortgages in their portfolios fell from 88 percent in 2017 to 77 percent in 2018, said Canada Mortgage and Housing Corp.

That means a greater share of their portfolios are second or third mortgages, which are riskier than the original mortgage on the property. Of course, true credit risk is concealed, as long as prices continue to rise. The delinquency rate at alternative lenders eased from 1.93 per cent in 2018 to 1.65 per cent last year.

At what point will incomes truly matter remains a decades old mystery. Indeed, it seems hard to make the math work from a house price to income ratio, even if you’re in the top 1%. Thankfully math is irrelevant in a sea of liquidity. As they say, a rising tide lifts all boats.

Three Things I’m Watching:

1. Here’s what it takes to be in the top 1% of income earners across the globe.

2. Canadian Yield curve remains deeply inverted. 89% of all spreads are negative.

3. Vancouver’s sales-to-new listing ratio also edged down in January, but still points to a jump in house price inflation to 10%.