Market Value vs. Mortgage Debt

The Canadian Real Estate Association announced this week that the average housing price in Canada fell 4.9% year-over-year to end 2018. After years of successful price gains, significantly led by Vancouver and Toronto, Canada is starting to experience a housing market slow down (again, led by Vancouver and to lesser extent Toronto). But these price drops are also significant because mortgage debt remains at a record level, and despite a slow down in annual growth, mortgage debt now tops $1.5 trillion.

This number taken against the whole of the housing market, roughly valued by us in the past at over $7.5 trillion, equals only 20% of the market’s worth. Unfortunately, we know that mortgage debt is not evenly distributed across all homeowners, making the actual exposure to these households much higher. The 2016 census revealed that nearly 40% of Canadian households are mortgage free, meaning 60% of homeowners are carrying a mortgage. This 60% is carrying a lot of debt and with prices starting to show some weakness, this could be a big problem.

Category Statistic
Homeownership rate in Canada 67.8%
Homeowners with a mortgage 60.3%
Total number of households with a mortgage 5,686,576

Source: Better Dwelling, Six Housing Sense

value to debtSource: Better Dwelling, Six Housing Sense

From these numbers we can begin to calculate the ratio of market value versus debt for those in this group, rather than looking at the housing market as a whole. Multiplying by the average home price ($472,280), these 5.7 million households hold a market value of roughly $2.76 trillion for the $1.5 trillion worth of debt that they hold. While that ratio is good, it is not as strong as it has been recently.

ratio debt to valueSource: Better Dwelling, Six Housing Sense

Over the past eight years, mortgage debt to market value for mortgage carrying households has ranged from 52-60%. The debt level was at its highest in relation to prices in 2012 at 60% before dropping as low a 52% in 2016 and 2017, when the average national price was soaring. In 2018, however, through rising mortgage rates and troubled housing prices, this ratio began to rise again to 56% (a significant one-year increase). Despite the reduced mortgage debt growth rate, debt still grew faster than housing value last year. While this is not great news for the average mortgage holder, it could be disastrous for a household that bought at the top of the market.

balance value to debt
Source: Better Dwelling, Six Housing Sense

Our final graph shows the balance between market value and mortgage debt the average mortgage holder has in Canada. As the graph shows, from 2011 to 2017 the gap between value and debt widened from $141,000 to $237,000. The housing market’s consistent growth limited the risk of larger mortgages because owners could always sale their home for more than they paid if they were in trouble. This may be changing now, as 2018 ended with lower prices than it began. After December the gap between value and mortgage debt shrunk by $28,000 down to $209,000, and though this remains a significant gap, downward price pressure is seldom a good thing for mortgage debt.

The drop in the national average home price in December brought headlines but it may turn out to be a blip on the radar. If national prices can achieve a timely recovery, the current level of mortgage debt in Canada will be justified by the strong market. If, however, prices continue to fall, households carrying massive mortgages will be under tremendous pressure. It is important to remember not all homeowners have seen the price of their home double since buying it, some have had to pay high modern prices and could be in real trouble in a downturn.

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