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Mortgage defaults after COVID-19 could look different than 2008, says economist

Deferrals were key to helping people keep their homes, economists say
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Bank of Canada economist says the current economic recovery could be different than the recovery from the financial crisis of 2008. Bank of Canada Governor Tiff Macklem holds a news conference, in Ottawa, Wednesday, July 15, 2020. THE CANADIAN PRESS/Adrian Wyld

A Bank of Canada economist says the current economic recovery could be different than the recovery from the financial crisis of 2008.

Bank of Canada Director of Financial Stability Mikael Khan said that while the employment rate has fallen due to the pandemic, house prices are recovering and keeping homeowners from filing for insolvency.

Khan said breaks from mortgage payments have bought home owners some time to get back to work amid the COVID-19 pandemic and economic downturn.

B次元官网网址淭he fact that these deferrals have been available is really, really important,B次元官网网址 said Khan. B次元官网网址淯ltimately what matters most when it comes to defaults is people having a job, having their incomes. What the deferrals are doing is theyB次元官网网址檙e essentially buying time for that process to unfold.B次元官网网址

Khan, who spoke at the Move Smartly Toronto Real Estate Summit on Monday, has been studying mortgage defaults. He compared the COVID-19 pandemic to a natural disaster, such as the 2016 wildfires in Fort McMurray, Alta., which also involved a mortgage deferral recovery plan.

Bank of Canada research found that while the wildfires caused a bigger spike in employment insurance filings than the 2008 recession, the EI trend reversed much faster after the fires than in 2008.

The 2008 conditions set off a lengthy recession due to B次元官网网址渁n underlying fragility in the global financial system,B次元官网网址 the research suggested. But the wildfires, like the COVID-19 pandemic, were a sudden shock.

B次元官网网址淥ne thing thatB次元官网网址檚 always very important when youB次元官网网址檙e facing a large negative shock is the initial conditions,B次元官网网址 said Khan.

B次元官网网址淚n Fort McMurray, when the wildfires hit, thatB次元官网网址檚 an area that had already been struggling for some time with the decline in oil prices that had occurred about a year or so prior, so financial stress was quite high B次元官网网址 Now, at the national level, what weB次元官网网址檝e been concerned about for many, many years is the high level of household debt. ThatB次元官网网址檚 the number one pre-existing condition that was there when the pandemic struck.B次元官网网址

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While there are some parallels, the rebuilding process from a pandemic remains more uncertain compared to a wildfire, the research said. Khan cited increased savings rates as an example of a fundamental shift with potential to affect how quickly the economy recovers from COVID-19.

Over the past few months, some have warned that it could lead to a deferral cliff once benefits B次元官网网址攕uch as Canada Emergency Response Benefit and mortgage deferrals B次元官网网址 run out.

B次元官网网址淲hen it comes to bumpiness in the recovery B次元官网网址 . this question that has been in the background of most of our discussions is, B次元官网网址楾o what extent will we see defaults or insolvencies?B次元官网网址橞次元官网网址 said Khan. B次元官网网址淚 think itB次元官网网址檚 reasonable to expect some sort of increase. What weB次元官网网址檇 be concerned about, there, is a very large-scale increase.B次元官网网址

Khan said that when a mortgage is in default, it can be caused by a B次元官网网址渄ual triggerB次元官网网址 of both unemployment and large decline in house prices. Home prices in many areas have recovered since the start of the pandemic, Khan said. The job marketB次元官网网址檚 recovery will be key to determining the impact of mortgage deferrals, said Bank of Canada research cited by Khan.

Softening population growth from immigration could start to weaken house prices in the future. But for now, Khan said, it wouldnB次元官网网址檛 make sense for homeowners with healthy home equity to file for insolvency.

B次元官网网址淓ven in cases where a homeowner simply canB次元官网网址檛 make their mortgage payments anymore B次元官网网址 as long as they have equity in their homes and the housing market is relatively stable B次元官网网址 thereB次元官网网址檚 always the option to simply sell without kind of resorting to those sorts of measures,B次元官网网址 said Khan.

The Canadian Press


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