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

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

The Vernon swimming pool is closed Friday. (morning star file photo)
Swim, skate and play fees rise 5% in Vernon

Weekend hours also reduced as rec centre struggles with fewer people and fewer funds

The team of horses is ready to pull riders for Caravan Farm Theatre’s sold-out Winter Sleigh-Ride Show of the Gift from Dec. 8-Jan.2. The Spallumcheen theatre company wants the province to include live theatre on its list of businesses allowed to operate during COVID-19. (File photo)
Spallumcheen theatre group plans for socially safe winter show to go on

Caravan Farm Theatre asks province to include live theatre on lists of businesses allowed to operate

A man wearing a face mask to help curb the spread of COVID-19 walks in downtown Vancouver, B.C., Sunday, Nov. 22, 2020. The use of masks is mandatory in indoor public and retail spaces in the province. THE CANADIAN PRESS/Darryl Dyck
104 new COVID-19 cases in Interior Health

IH is reporting the new numbers since Friday, Nov. 20

Lumby Mayor Kevin Acton (left) and Regional District North Okanagan Electoral Area D Rural Lumby director Rick Fairbairn (right) congratulate members of the Lumby and District Fire Department for receiving gold pin awards in response to a rollover accident in July 2020. (RDNO Photo)
Lumby firefighters golden in duty

Company presents firefighters with gold pin for heroic efforts following rollover crash

RCMP pictured at a motor vehicle incident during snowy conditions. (Phil McLachlan - Black Press Media)
B&E, stolen car in Vernon lands Whitehorse man in cuffs

Suspect takes off on foot in attempts to evade arrest

People wearing face masks to help curb the spread of COVID-19 cross a street in downtown Vancouver, on Sunday, November 22, 2020. The use of masks is mandatory in indoor public and retail spaces in the province. THE CANADIAN PRESS/Darryl Dyck
B.C. reports 17 COVID deaths, 1,933 new cases as hospitalizations surge over the weekend

There are 277 people in hospital, of whom 59 are in ICU or critical care

Join Black Press Media and Do Some Good
Join Black Press Media and Do Some Good

Pay it Forward program supports local businesses in their community giving

An aerial shot of Cedar Valley Lodge this past August, LNG Canada’s newest accommodation for workers at the project site in Kitimat. This is where several employees are isolating after a COVID-19 outbreak was declared last Thursday (Nov. 19). (Photo courtesy of LNG Canada)
Forty-one positive COVID-19 cases associated with the LNG Canada site outbreak in Kitimat

Thirty-four of the 41 cases remain active, according to Northern Health

A concept rendering of the proposed Costco at the corner of Baron, Leckie and Springfield roads. (WSP Global)
Contentious Kelowna Costco relocation moved to public hearing

Costco looking to move less than a kilometre away to build a larger store with more parking, gas bar

7-year-old Mackenzie Hodge from Penticton sent a hand-written letter to premiere John Horgan asking if she’d be able to see her elf, Ralph under the new coronavirus restrictions. (John Horgan / Twitter)
Elf on the shelf an acceptable house guest B.C. premier tells Okanagan girl

A 7-year-old from Penticton penned a letter asking if she’d be allowed to see her elf this year

Workers arrive at the Lynn Valley Care Centre seniors home, in North Vancouver, B.C., on Saturday, March 14, 2020. It was the site of Canada’s first COVID-19 outbreak in a long-term care facility. THE CANADIAN PRESS/Darryl Dyck
Rapid tests ‘not a panacea’ for care homes, Dr. Bonnie Henry says

B.C. lacks capacity for daily tests of thousands of workers

(Delta Police Department photo)
Cannabis edibles found in Halloween bag lead B.C. police to illegal lab

Delta police arrested a man and a woman while executing a warrant at a residential property Nov. 20

Penticton Search and Rescue along with the Penticton Fire Department located and airlifted an injured 21-year-old female hiker Sunday, Nov. 22, 2020. (Mike Biden photo)
Penticton search and rescue airlift injured hiker off mountain

There has been an unprecedented amount of calls for search and rescue this year

Most Read