Looks like mortgage stress testing came just in time for Canadian real estate buyers. Canada Mortgage and Housing Corporation (CMHC) numbers via Equifax show more borrowers turned to huge mortgages in Q4 2018. The share of large mortgages far outgrew the pace of more modestly sized ones across the country.

What Are We Looking At?

Borrowers with higher debt loads, are more sensitive to interest rates hikes. That is, as rates rise, the cost of servicing their mortgage will be more impactful on their finances. The greater the interest paid, the less money to spend or invest in the economy. That’s why we’re looking at mortgage distribution data today. More specifically, the size of mortgage people are taking out, in relation to the market.

We know, what if these people with mega mortgages have deep pockets? Some might, but the evidence that these large borrowers aren’t as well off as you would guess. The Bank of Canada warned earlier this year that 8% of mortgage holders owe 20% of the total mortgage debt. Even worse, these borrowers have mortgage debt greater than 350% of their gross income. Best case scenario, these households experience reduced cash flow and slowdown the economy. Worst case scenario… let’s just stick with the best case for today.

Over 13% of Canadians Took Out A Mortgage Over $600,000

Canadians starting with larger mortgage balances jumped in market share. Mortgages with a starting balance between $400,000 – $600,000 represented 18.92% of originations in Q4 2017. That’s a substantial increase from Q4 2016, when 17.72% of mortgages were in that range. Mortgages greater than $600k saw one of the biggest leaps, representing 13.86% of the market in Q4 2017. Mortgages of that size were just 11.64% of the market in the same quarter of 2016. Yup, over one in ten Canadian buyers at the end of last year took out over a half a million for their home.

Canadian Mortgages By Market Share

The market share of mortgage originations by dollar size across Canada.

Source: CMHC, Equifax. Better Dwelling.

Modest Mortgages Are On The Decline Across The Country

Who wants an affordable option, when you can max out your credit? Mortgages of $100,000 to $200,000 across Canada fell to 20.53% of 2017 Q4 originations, up from 18.92% last year. Mortgages between $200,000 to $300,000 represented 24.73% of originations, down from 25.97% last year. Most of the gains in larger markets, are at the expense of modestly sized mortgages.

The reasons why the B-20 mortgage stress test has been introduced gets clearer by the day. Home prices can only rise as quickly as people are willing to take out credit. People maxed out their credit as fast as they could, falling for the home shortage narrative. This created a dangerous pool of debt, as interest rates were rising. Today’s buyers shouldn’t be complaining that they can’t borrow as much as they could last year. Instead they should be thanking regulators for preventing reckless competition for homes.

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