House bubble
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Mortgage arrears in Canada are set to increase as a result of the economic shock from Covid-19, rating agency DBRS Morningstar says, though the severity will depend on how long it takes for economies to reopen.

A DBRS report outlined two scenarios for how the pandemic could impact Canada’s mortgage market.

In the moderate scenario, mortgage arrears increase to 65 basis points in 2020 before gradually declining, while home prices drop 10% through 2022.

In the adverse scenario, mortgage arrears rise to 100 basis points and housing prices see a 15% correction by 2022. The oil-producing provinces see a greater rise in mortgage arrears, but the formerly hot housing markets of Toronto, Vancouver, Ottawa and Victoria see the most significant declines in house prices.

This week, the Toronto Regional Real Estate Board said April home prices in the Greater Toronto Area fell 11.8% from March on a seasonally adjusted basis.

In Vancouver, home sales hit their lowest levels in nearly 40 years in April, and experts say buyers can expect price declines to eventually follow.

The Canadian economy lost more than a million jobs in March, and economists expect April will be even worse when the numbers are released on Friday.

The employment shock comes as Canadian debt to disposable income is at 176%. The federal government’s emergency fiscal support should cushion the impact of unemployment and help with mortgages in the near term, the DBRS report said, but “the rise in unemployment will inevitably lead more households to fall behind, and potentially default, on their mortgage payments.”

In addition to federal government support, banks are offering mortgage payment deferrals of up to six months for borrowers affected by the virus on a case-by-case basis.

Some workers won’t be eligible for federal programs, the report said, and for others, the support won’t be enough.

“Many lenders have also said that deferrals would only be an option for those borrowers that were in good standing prior to the crisis and current on their mortgage payments,” the DBRS report said.

“This means that many people who were struggling to meet their mortgage obligations before the shock are unlikely to find much relief and could see their arrears balance increase.”

DBRS’s moderate scenario assumes strict social-distancing measures are gradually relaxed this quarter, with a relatively robust economic recovery in the third quarter. Growth is above trend next year and the national unemployment rate goes below 8% by the end of 2021.

In the adverse scenario, containment measures are more drawn out and the recession is deeper, with long-lasting damage to some sectors. The national unemployment rate stays in double digits until the second half of 2021.

The report assumes that arrears increase nine basis points for each percentage point increase in the unemployment rate.

“In the moderate scenario, arrears nationwide increase to approximately 0.65% in 2020 as the unemployment rate hits 10%. In the adverse scenario, mortgage arrears rise to 1.00%, which would be on par with the early 1980s when Canada experienced its worst housing market crash.”