TransUnion’s Canada Industry Insights Report (IIR) for Q1 2018 raises some interesting questions about the impact of new mortgage qualifying rules on consumer behaviour.
Consumers seem cautious about new mortgage rules
In October 2017, the Office of the Superintendent of Financial Institutions Canada (OSFI) published changes to mortgage rules that would come into effect on January 2018. One of the new rules requires anyone applying to finance or refinance a mortgage to pass a stress test—in other words, prove they’d be able to cope financially if interest rates went up.
Given that the stress test could make it more difficult to obtain financing, even with a hefty downpayment, it would have been no surprise to see a spike in mortgage originations between the announcement and the implementation of the new rules. Interestingly, though, mortgage origination volumes were down by 8.8% between Q4 2016 and Q4 2017.
TransUnion observed a slowing in origination volumes everywhere except in British Columbia, while balances continued to grow nationwide. Are consumers taking a wait and see approach to the new qualifying rules that came into effect? Are they pausing to measure the effect on home prices?
It would seem that, perhaps, consumers are being circumspect about the OFSI’s latest regulations. Rather than rushing to finance a home at the highest possible amount under the old regime, they’re waiting to see how the new system will affect the property market in general, and home prices in particular.
TransUnion’s Canada Industry Insights Report for the first quarter of the year also reported a slowdown in mortgage originations everywhere but in British Columbia. Balances continued to grow across the country, though, and the value of the average new mortgage ($284,000) is up 3.5% from the previous year.
Mortgage balances are generations apart
The average mortgage loan balance in Q1 2018 was $257,814, up 4.9% annually. However, not all consumers are following a similar trend when it comes to mortgage originations. What we’re seeing is a significant difference at different life stages: mortgage balances for the Pre-war/Silent generation were up 7.8%, perhaps suggesting that consumers in these generations are using the value of their properties as leverage for financing other needs.
Mortgage balances for Millennials, on the other hand, fell 19.5%. For these consumers, the picture is quite different: competing financial needs means pricey properties aren’t an option for now. And, given the recent interest rate hike, they may well be breathing a sigh of relief for choosing lower-priced homes instead. It will be interesting to see how these various market forces impact mortgage numbers over the coming year.
Overall consumer debt is still rising
In our quarterly analysis of over 28.5 million active Canadian credit users, we have seen average non-mortgage debt balances increase at a compound annual growth rate of 1.3% over the past two years. The increase in overall debt continued in Q1 2018 as average consumer non-mortgage debt rose to $29,181. However, this rate of growth has slowed over the past three quarters to total growth of only 0.7%. This may be an early indicator of a drop in consumer demand for credit as the economy slows and interest rates rise. This is supported by the latest data from Statistics Canada, where the disposable income ratio declined 1.7% to 168 as disposable income increased at a faster rate (+1.3%) than credit market debt (+0.3%) 1.
Average Consumer Balance, by Product*
*Represents the average balance held by a consumer across each type of product (consumers can have multiple instances of same product).
While Canadian consumer debt did still rise in recent quarters, it is important to note that this is against the backdrop of a period of solid economic expansion. The combination of better-than-expected GDP growth, the lowest average unemployment rate in decades, and increased median household income have boosted consumer confidence. Coupled with continued increases in home values, consumers have continued to take on debt. However, recent events including interest rate increases and a series of changes to mortgage lending guidelines may be catalysts for consumers potentially slowing their use of credit. In addition to the slowing balance growth, we have noticed a decline overall in new credit product origination, indicating less appetite for more credit products as well.
Despite the run-up in debt in recent years, we continue to see that there are no critical stresses in consumer ability to manage this debt. The report also showed a continued drop in consumer serious delinquency rates (consumers who are 90 or more days past due one or more non-mortgage debt obligation); the delinquency rate in Q1 2018 dropped by 28 basis points from the prior year to 5.4%.