Why Mortgage Market Stress Could Outpace Projections Despite BoC Rate Adjustments

February 7, 2025

By: Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI?

When assessing the 2025 outlook for Canada’s real estate market, our perspective was less optimistic than that of many leading publications. This divergence stemmed from several factors, chief among them being the growing financial vulnerability of the Canadian economy—primarily driven by rising household indebtedness and a weakening market structure. The housing market is under significant strain, with increasing mortgage delinquencies signaling a potential wave of defaults. Falling home prices, declining rental income, and the impending mortgage renewal crisis—often referred to as the "mortgage cliff"—are exacerbating financial pressures on homeowners, leaving many at risk of default. This analysis explores the factors that could require more than the Bank of Canada’s planned rate cuts to prevent weaknesses in the residential real estate market from spilling over into the broader economy through the mortgage sector.?

The Macro Backdrop: Rising Delinquencies and Early Warning Signs?

Recent data indicates that mortgage delinquencies are on the rise across Canada. As of Q3 2024, the national mortgage delinquency rate has climbed to 0.20%, up from 0.14% in 2022. While these levels remain below pre-pandemic highs, the pace of increase is concerning, particularly in key urban markets such as Toronto, where delinquency rates have doubled to 0.16%, the highest since 2015.?

Early warning indicators, including rising delinquencies in credit cards and auto loans, suggest further financial distress among consumers. Non-mortgage delinquency rates have surged nearly 29% year-over-year, with auto loan defaults reaching 2.42%, the highest in over a decade. Historically, rising defaults in unsecured credit markets have preceded mortgage delinquency spikes as financially strained borrowers deplete their liquidity buffers before missing mortgage payments.?

Figure 1.0?

Figure 2.0?

While delinquency rates among traditional banks remain relatively low, non-bank lenders—such as mortgage investment entities (MIEs) and private lenders—are experiencing significantly higher default rates. Private mortgage lenders now account for 16.8% of all new mortgages, a sharp increase from previous years, and their portfolios are significantly riskier than those held by major banks [1].?

Moreover, delinquency rates for private mortgage lenders have exceeded 2%, compared to just 0.2% among chartered banks [2]. This sector also accounts for a growing share of distressed home sales, as borrowers unable to refinance at traditional institutions resort to high-cost private lenders before ultimately defaulting.?

The Mortgage Cliff: Higher Renewal Rates and Payment Shocks?

Canada’s mortgage structure, which relies heavily on short-term fixed-rate loans, exposes homeowners to frequent renewal risks, increasing financial strain. The "mortgage cliff" refers to the wave of homeowners who secured ultra-low interest rates between 2020-2022 and must now renew at substantially higher rates.?

• A homeowner with a $500,000 mortgage at a 2% interest rate previously had a monthly payment of approximately $2,118.?

• At a renewal rate of 4.2%, that payment increases to around $2,700, a sharp 30% rise.?

This is not an isolated issue—1.2 million fixed-rate mortgages worth over $300 billion are set for renewal in 2025. Over 85% of these mortgages were originally contracted when BoC rates were at or below 1% [3]. These homeowners now face a payment shock that could push many into default. If just 5% of these mortgages were to default, it would result in $15 billion in bad debt.?

Another key indicator of financial stress is the rising allocation for expected credit losses (ECLs) by Canadian banks and lenders. Banks have significantly increased reserves in anticipation of future defaults, with ECL allowances surpassing levels seen during the pandemic and approaching those of the global financial crisis, reaching 0.26% of outstanding mortgages as of Q3 2024 [4].??

This shift in provisioning strategies highlights growing concerns among financial institutions that even prime borrowers may struggle to refinance at significantly higher rates. The correlation between ECLs and actual delinquencies suggests that mortgage defaults will continue to rise in the coming quarters. Historically, delinquency rates have followed increases in ECLs by 6-12 months, implying that mortgage delinquencies could climb to 0.27% by Q3 2025, the highest level in over a decade.?

Falling Home Prices, Rental Market Struggles, and Negative Equity Trap?

Home values have declined by 15-20% in several regions since their 2022 peak, significantly increasing default risks. Homeowners with minimal equity—particularly those who purchased at inflated valuations during record-low interest rates—are now facing heightened financial strain. As property values continue to erode, many borrowers are finding themselves in negative equity, where the outstanding mortgage balance exceeds the property’s market value.?

Recent market reports indicate that over 20% of homeowners who bought between 2021 and 2022 are already in negative equity positions. If home prices decline further, distressed borrowers with limited refinancing options may have no choice but to default.?

Additionally, a cooling rental market is exacerbating financial stress for investors. Average rental rates in key markets like Toronto and Vancouver have fallen by 5-8%, reducing rental income and making it increasingly difficult for leveraged investors to cover mortgage payments. As rental yields shrink, some investors are being forced to sell, contributing to an oversupply of units and further price declines.?

This trend is also reflected in the declining sales-to-new-listings (SNL) ratio, a key metric in predicting mortgage arrears. Historically, a decline in the sales-to-new-listings ratio (SNLR) has been followed by an increase in mortgage arrears within 6 to 12 months, as weaker sales activity limits homeowners’ ability to offload properties before falling into arrears [5]. Given the consistent downward trend in the SNL ratio, combined with the large volume of mortgages set for renewal at higher rates, a surge in delinquencies appears increasingly likely. If historical patterns hold, arrears could spike within the next two to three quarters.

Figure 3.0?

According to analyst reports by KBW Inc., a 20% decline in home values could leave $46 billion in loans underwater, making refinancing more difficult for struggling borrowers [6].?

The Structural Shift: Investment Properties and Multi-Party Ownership Risk?

Sluggish sales and declining home prices have exposed a significant but often overlooked risk in the Canadian real estate market—the sharp rise in investment property ownership. Compared to the pre-pandemic period, a larger share of mortgages are now tied to investment properties, which would have a higher propensity for default when cash flows turn negative. Recent household credit data shows that Canadian real estate investors accounted for 30.4% of all home-buying transactions in Q1 2024, setting a new record.?

Figure 4.0?

The rise in multi-party co-ownership adds another layer of complexity. In these arrangements, multiple individuals pool resources to purchase properties. Affordability remains a primary driver, with 76% of co-owners citing financial reasons for their decision. This figure rises to 83% among individuals aged 25 to 34, underscoring the financial challenges younger Canadians face in entering the housing market [7]. While this helps buyers enter the market, it increases the risk of default when financial conditions tighten.?

While multi-party ownership provides an entry point into the market, it also introduces significant financial risks. In periods of economic stress or declining home values, co-owned properties are more susceptible to default, as multiple owners may have differing financial priorities and varying levels of commitment to maintaining mortgage payments.?

Recent data underscores the rising prevalence of co-ownership arrangements across the country as a response to affordability constraints:?

• Prevalence of Co-Ownership: A 2023 survey by Royal LePage found that approximately 6% of Canadian homeowners co-own their property with someone other than a spouse or significant other. Among these co-owners, 89% partnered with family members, while 7% co-owned with friends [8].??

• Generational Co-Ownership: According to Statistics Canada, in 2021, 17.3% of residential properties owned by individuals born in the 1990s were co-owned with their parents. This trend is particularly pronounced in higher-priced urban markets such as Toronto and Vancouver [9].??

• Regional Variations: Ontario and British Columbia have the highest rates of parent-child co-ownership, at 20% and 20.5%, respectively. Within these provinces, Toronto (27%) and Vancouver (24%) have the highest co-ownership rates [10].??

Key Risks of Multi-Party Ownership:?

While co-ownership offers a path to homeownership, it comes with several financial and structural risks that could amplify market stress in a downturn:?

1. Divergent Financial Priorities: Co-owners may have different financial situations and goals. If one party experiences financial strain or loses interest in maintaining the investment, it can jeopardize mortgage payments for all involved.?
2. Lower Individual Loss Burden: Unlike sole ownership, co-owners typically hold a smaller fraction of equity in the property. This reduces their personal financial exposure, making strategic defaults more likely if the investment turns unprofitable.?
3. Coordination and Decision-Making Issues: Managing a property with multiple owners requires consensus on key decisions, including selling, refinancing, and maintaining the property. Disagreements or misalignment of financial interests can lead to delays in critical decisions, further exacerbating financial losses.?

While co-ownership has provided a temporary solution to affordability challenges, its risks may become more apparent in an environment of declining home values, rising mortgage payments, and weakening rental income.?

Fragility of Canada's Current Economic Environment?

While mortgage renewals will undoubtedly act as a drag on the economy, their impact could be manageable if the Bank of Canada (BoC) continues its rate-cutting cycle. However, a more immediate and pressing concern is the weakening labor market, which poses a greater risk to Canada’s broader economic stability.?

Although the BoC has started cutting rates, the deteriorating employment landscape signals deeper structural weaknesses. Over the past year, Canada's unemployment rate has risen significantly, increasing from 5% at the beginning of 2023 to 6.5% by September 2024 [11]. By December 2024, the rate had climbed to 6.7%, well above pre-pandemic levels [12].?

Adding to these concerns, the total number of job vacancies has declined by 25% year-over-year, a stark reversal from the previous period when there were more openings than job seekers [13]. Initially, the decline in vacancies did not materially affect the labor market. However, as hiring demand weakens, the job market is becoming increasingly competitive, leaving more Canadians unemployed or underemployed.??

Figure 5.0?

The rising unemployment rate is also reflected in soaring consumer insolvencies, signaling mounting financial distress. In Q3 2024, consumer insolvency filings reached 34,588, marking an 8.8% year-over-year increase [14]. Over the 12-month period ending September 30, 2024, insolvencies surged by 15.4%, highlighting the growing inability of households to manage their debt obligations [15].?

Business insolvencies have escalated even more dramatically, rising by 48.6% over the same 12-month period. Key industries, including manufacturing, construction, and retail, have been disproportionately impacted, suggesting that financial instability is spreading beyond households to corporate balance sheets.?

Further exacerbating Canada’s economic challenges are heightened trade tensions. Potential U.S. tariffs on Canadian exports pose a significant risk, potentially eroding trade revenues and driving job losses in key export-dependent industries. The impact of these tariffs could amplify existing economic stressors, including:?

• Reduced export demand, leading to lower industrial output and corporate layoffs.?

• Increased costs for Canadian businesses, which may be passed on to consumers, further tightening household budgets.?

• Weakening consumer confidence, discouraging discretionary spending and prolonging economic stagnation.?

The combination of rising unemployment, escalating insolvencies, and increasing trade tensions underscores the fragility of Canada’s economic outlook. While interest rate cuts may provide some relief, they are unlikely to fully offset the financial pressures facing Canadian households and businesses. Without stronger labor market stability and trade policy resolutions, economic stress could intensify, further amplifying financial vulnerabilities across the real estate and banking sectors.?

As Canada’s real estate market faces mounting challenges, the Real Estate Institute of Canada (REIC) is committed to equipping professionals with the knowledge, ethics, and strategic insights needed to navigate these turbulent times. Our industry-leading certifications and professional development programs empower real estate professionals to mitigate risks, adapt to market shifts, and uphold industry excellence. In an evolving landscape, expertise matters more than ever, REIC equips its members to stay ahead of the curve, build trust with clients, and lead confidently through market volatility.?

[1] Ontario Regulator Flags Risks in Growing Private Mortgage Sector

[2] Residential Mortgage Industry Report

[3] ?Slow Mortgage Growth Continued as Homebuyers Remained on Sidelines

[4] Chartered banks, Mortgage Loans Report, End of Period, Bank of Canada (x 1,000,000)

[5] Analysis of the Canadian Residential Mortgage Market

[6] Canadian Home Price Drop Risks Pushing $34 Billion in Loans Underwater

[7] Co-ownership on The Rise: How Canadians are Responding to Housing Affordability Challenges

[8] Co-ownership on The Rise: How Canadians are Responding to Housing Affordability Challenges

[9] Intergenerational Housing Outcomes in Canada

[10] 60% Young Canadians Turning to Family for Help To Enter Housing Market: Statistics Canada

[11] The Factors Behind the Rise in Unemployment

[12] Labour Force Survey, December 2024

[13] Proof point: Job Market is Bigger Risk to Canada’s Economy than Mortgage Renewals

[14] Insolvency Statistics in Canada — September 2024 (Highlights)

[15] Insolvency Statistics in Canada — September 2024 (Highlights)

Founded in 1955, the Real Estate Institute of Canada (REIC) is a distinguished organization committed to advancing professionalism and ethical standards in the real estate industry. REIC empowers individuals through a robust educational framework, offering courses and esteemed designations such as the prestigious Fellow of the Real Estate Institute (FRI), Certifies Real Estate Specialist (CRES), and the Certified Leasing Officer (CLO), which recognizes exceptional achievement in the profession. We elevate the caliber and integrity of real estate professionals by providing unparalleled learning opportunities, fostering a culture of excellence, and promoting ethical business practices. Through targeted programs, networking events, and advocacy, REIC plays a pivotal role in shaping skilled, ethical, and successful real estate practitioners, enhancing the industry's overall reputation and effectiveness.?

Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected].