Fewer Canadians were taking out new mortgages, even before the rate hikes began. Mortgage origination data from TransUnion shows how originations fell sharply in Q4 2021. Not one province showed annual growth, with Ontario leading the way lower. As Canadian real estate prices climbed, fewer people were qualified to buy. This can act as friction against higher prices, as long as there is no policy intervention.
Canadian Mortgage Originations Have Begun Falling
Canadian mortgage debt is soaring but the increase isn’t being driven by new mortgages. Mortgage originations showed annual growth fall to -11.4% in Q4 2021. A contraction of this size hasn’t been seen since at least 2019. However, it isn’t unexpected after growth peaked at 48.6% in Q2 2021.
It’s easy to assume this is due to interest rates but the timeline doesn’t make sense. This was before the rate hikes and when home prices began to make the biggest climbs. A small market of very exuberant buyers had been driving prices higher by themselves.
All Provinces Have Seen Mortgage Originations Drop, But Ontario Leads
All provinces across Canada have seen mortgage originations fall lower. Annual growth in Q4 2021 fell the most in Ontario (-14.3%), Saskatchewan (-13.2%), and Manitoba (-12.3%). BC (-10.3%) also showed a very large drop but the province is underrepresented in contrast to the national drop.
Very Large Mortgages Are In While Small Ones Are Out
A rapid rise in home prices may have something to do with the drop, as mortgage loans size shifts. Volumes contracted for mortgages smaller than $250k (-19%), and those between $250k and $500k (-15%). As for modest-sized mortgages between $500k and $750k, they showed less-than-modest gains.
Deep pocketed buyers appear to be the only growth area for mortgage originations. Those with a mortgage limit between $750k to $1 million (+35%) showed substantial growth. The fastest growing segment was mortgages $1 million and above (57%). Steep valuations pushed home prices to a market of deep-pocketed buyers.
The falling originations are often blamed on rising rates but that’s not totally true. Canada didn’t raise interest rates until several quarters after, while home prices climbed. Instead, this is likely due to the cost of housing, which is now out of the grasp of those with regular incomes.
Efficient markets help to resolve issues like this by reducing demand. Reduced demand of qualified buyers eventually reduces prices until it finds a floor. Central banks temporarily broke this concept intentionally with quantitative ease (QE), in order to drive more inflation. As that phase winda down, interest rates are normalizing demand to more typical levels. In the medium term, pending no intervention, home prices might even normalize as well.
