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

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

Deferrals were key to helping people keep their homes, economists say

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.

“The fact that these deferrals have been available is really, really important,” said Khan. “Ultimately what matters most when it comes to defaults is people having a job, having their incomes. What the deferrals are doing is they’re essentially buying time for that process to unfold.”

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 “an underlying fragility in the global financial system,” the research suggested. But the wildfires, like the COVID-19 pandemic, were a sudden shock.

“One thing that’s always very important when you’re facing a large negative shock is the initial conditions,” said Khan.

“In Fort McMurray, when the wildfires hit, that’s 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 … Now, at the national level, what we’ve been concerned about for many, many years is the high level of household debt. That’s the number one pre-existing condition that was there when the pandemic struck.”

READ MORE: B.C.’s COVID-19 deficit could go deeper than $12.5 billion

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 —such as Canada Emergency Response Benefit and mortgage deferrals — run out.

“When it comes to bumpiness in the recovery … . this question that has been in the background of most of our discussions is, ‘To what extent will we see defaults or insolvencies?’” said Khan. “I think it’s reasonable to expect some sort of increase. What we’d be concerned about, there, is a very large-scale increase.”

Khan said that when a mortgage is in default, it can be caused by a “dual trigger” 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 market’s 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 wouldn’t make sense for homeowners with healthy home equity to file for insolvency.

“Even in cases where a homeowner simply can’t make their mortgage payments anymore — as long as they have equity in their homes and the housing market is relatively stable — there’s always the option to simply sell without kind of resorting to those sorts of measures,” said Khan.

The Canadian Press


Like us on Facebook and follow us on Twitter.

Want to support local journalism during the pandemic? Make a donation here.

Real estate

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Vancouver Island team takes on wacky challenges of world’s largest scavenger hunt

Greatest International Scavenger Hunt taking place Aug. 1-8

Drive-in movie screenings next week will benefit Nanaimo food bank

Fortis B.C. and Fresh Air Cinema holding fundraisers at Woodgrove Centre

Nanaimo barber looks at new style for back-to-school fundraiser

Dave Lawrence of That 50’s Barber Shop getting tattoo in Fresh Start promo on Aug. 17

Neighbours try to clean up around nuisance drug house on Milton Street in Nanaimo

560 Milton St. was declared a nuisance property last month

V.I. Raiders’ junior football season gets cancelled

CJFL says it will focus on a return-to-play plan for 2021

53 new COVID-19 cases, no new deaths cap off week of high infection rates in B.C.

Roughly 1,500 people are self-isolating because they either have COVID-19 or have been exposed to it

Moving on: Tanev scores 11 seconds into OT as Canucks oust Wild

Vancouver beats Minnesota 5-4 to move into first round of NHL playoffs

Island Health warning of spike in overdoses in Nanaimo area

Substance users advised to visit overdose prevention site on Wesley Street in Nanaimo

Do-over vote has similar result, 280-unit development in Lantzville going to public hearing

Mayor’s motion to rescind Clark/Medd application’s second reading fails 3-2

B.C. wildfire crews have battled 111 blazes in the last seven days

Twenty-nine fires remain active, as of Friday (Aug 7)

Fitness non-profit challenges citizens to invent a game to be physically active

The campaign was launched after a study showed only 4.8 per cent of children and youths in Canada met required standards of the 24-hour movement guidelines

Cowichan RCMP use spike belts to end car chase — man in custody

The driver was arrested at the scene a short distance from his vehicle

Walmart to make face masks mandatory for customers across Canada

Requirement goes into effect on Wednesday, Aug. 12 across Canada

Beefs & Bouquets, Aug. 5

To submit a beef or a bouquet to the Nanaimo News Bulletin, e-mail editor@nanaimobulletin.com

Most Read