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RBC warns mortgage delinquencies could surge in 2023

A new report from RBC has raised concerns about the possibility of a significant increase in mortgage delinquencies in Canada in the coming year.

The warning comes as the country’s housing market experiences a slowdown in growth, and more consumers are struggling to keep up with their mortgage payments.

David McDonald, a senior economist at the Canadian Centre for Policy Alternatives, shed light on the situation.

During the pandemic, consumer delinquencies, including car loans and credit cards, saw a substantial decrease.

Additionally, mortgage delinquencies had been declining for a considerable period of time as people focused on paying down debt.

However, the situation has reversed recently.

With fewer restrictions and more spending opportunities, individuals are finding it harder to maintain their financial obligations, leading to a projected increase of about a third in mortgage delinquencies over the next year.

McDonald emphasized that although the projected increase is significant, it would not bring delinquency levels to the same extent as before the pandemic.

Currently, approximately 99.85% of mortgages are up to date and not in delinquency.

Even with the projected rise, the percentage would only drop slightly to around 99.8%.

McDonald highlighted the need to put the numbers into perspective and reassured that the change, while notable, would not be a dramatic shift from pre-pandemic levels.

When discussing the impact of these potential delinquencies, McDonald pointed out that homeowners are more likely to face bankruptcy if the value of their house has decreased.

Currently, the labor market is strong, and wages are rising, so job loss isn’t a significant factor at this point.

However, if a recession were to occur later this year or in early 2024, resulting in increased unemployment rates and higher interest rates, more individuals could face difficulties in meeting their mortgage obligations.

It is crucial to note that for delinquencies to translate into bankruptcies, a decline in house value is necessary.

Fortunately, house prices have remained relatively high, despite some decrease since last year, providing homeowners with the option to sell their houses to cover their mortgages.

While the impact on mortgage delinquencies is primarily linked to individuals who purchased homes in recent years and might face job loss, the situation is slightly more concerning for consumer delinquencies.

People with credit card loans and car loans might be hit harder, as they don’t have an asset like a house to fall back on.

If they lose their jobs and face higher interest rates, it could create a significant financial bind.

Additionally, those who are less wealthy and lack other assets to rely on are at greater risk.

McDonald expressed greater concern over consumer delinquencies compared to mortgage delinquencies.

The report from RBC serves as a warning sign for policymakers and individuals alike, highlighting the potential challenges that lie ahead in the Canadian housing market.

As the country grapples with a slowdown in housing growth and the economic impacts of the pandemic, it becomes crucial to closely monitor the situation and implement measures to support those facing financial difficulties.

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