Things are about to get worse for Canadian real estate, according to a credit rating giant. Fitch Ratings dropped its latest analysis to clients on risk in the mortgage bond market. The agency’s analysis shows high flying global real estate prices are likely to correct, with Canada expected to experience one of the biggest booms and busts in the world. Rising mortgage rates and deteriorating economic conditions are seen driving the delinquency rate higher, but not above pre-2020 levels.

Canada’s Housing Had One of The Biggest Booms, Followed By Bust

Canadian residential real estate prices showed one of the sharpest climbs in the world. Home prices climbed a whopping 41% from 2020 to the peak in 2022. The gain was just below the US (+43%), which made one of the world’s most aggressive climbs.

Such a large jump in a short period has produced lofty valuations, and the agency expects a pullback. Canadian home prices are forecast to fall 15% from peak to trough, with the agency seeing losses throughout this year. It’s the second biggest forecast correction from the agency, with Australia (-16%) expected to take a slightly bigger hit.

The agency estimates Canadian real estate prices were 29% overvalued by the end of 2022. With surging wages, falling home prices, and rate stabilization—they believe the overvaluation will come down sharply in the coming months. Though they don’t expect the overvaluation to completely disappear, especially in Toronto and Vancouver. They’ll take large hits though.

Mortgage Payments Are On The Rise, Delinquencies To Follow

Mortgage payments are on the rise, providing a little stress for a share of households. The agency found fixed rate mortgage borrowers have seen monthly payments rise $300 on average. Variable rate mortgage borrowers took a bigger hit, with an average increase of $700 per month. Though there’s a few reasons to believe the potential economic fallout presented in the media is overamplified.

Not as many people are exposed to variable rate mortgages, and many experienced a boost in savings. Only a third of households have a mortgage, and of those Fitch estimates 70% are on five-year fixed rate terms. That’s a very tiny segment exposed to a sharp rising overnight rate, and there are tools to mitigate the pain such as extending amortizations.

Still, when combined with weakening economic conditions, delinquencies will arise. The agency is forecasting the arrivals rate will climb 64% to 0.23 points of mortgages in 2024. It’s a sharp increase from current levels, but still below pre-2020 levels. Velocity might make it feel like there’s a big change, especially if you’re suddenly seeing the power of sales when they have been scarce for so long.

Since 2020, cheap credit and assistance prevent defaults, distort the system. As credit gets worked out of the system and defaults normalize to non-stimulus conditions, things are seen as returning towards pre-2020 metrics when it comes to defaults and sales. Prices appear to be the only exception when it comes to their forecast.

Home prices aren’t seen as fully correcting the overvaluation. The agency explained these expectations are based on the US having a mild recession. Since the trade relationship is so close, the size of an American downturn is an important factor. If things erode in the US worse-than-expected, they warn it can test Canada’s resilience.

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