A chill has settled over Canada’s housing market and the big fear of any downturn is that heavily indebted homeowners will be forced to sell, fuelling a downward spiral.

Capital Economics says it is now seeing signs that those risks are rising.

The focus of the economists’ concern is mortgages refinanced with non-bank lenders.

Chartered banks must ensure that borrowers meet mortgage stress tests, but alternative lenders are less regulated.

Statistics Canada data show that the share of non-bank mortgages in the second quarter was no higher than in late 2021, before the Bank of Canada began raising interest rates, said Capital. The share of non-bank mortgages in arrears was also well within normal ranges.

But Capital says a closer look shows reason for concern. Recent data show a big rise in the number of insured mortgages being refinanced with non-bank lenders for the first time.

This is significant because homebuyers need default insurance in Canada when their loan-to-value ratio is more than 80 per cent, and it often means they have stretched their finances to purchase the home.

“These borrowers are therefore more likely to fall afoul of the stress tests when mortgage rates rise,” said Stephen Brown, Capital’s deputy chief North America economist.

“The rise in insured mortgage refinancing with alternative lenders suggests many borrowers are no longer able to pass the stress tests at their original provider.”

So far the numbers are small, he said. In the second quarter, 3,784 insured mortgages were refinanced for the first time with alternative lenders, about 4.3 per cent of refinancings at non-bank lenders and about 0.5 per cent of all refinancings.

Capital says there are likely to be more insured mortgagors who will struggle to refinance in the months ahead.

Since home prices have declined 10 per cent since 2022, the homeowners who held less than 20 per cent equity in their home could be either in negative territory or above the loan-to-value limit of 95 per cent, said Brown.

They would also be refinancing at much higher rates than in 2022. Five-year fixed mortgage rates of near six per cent mean a stress test rate of close to eight per cent.

“While non-bank lenders stepped in to help these borrowers earlier this year, they may less inclined to do so now that falling house prices are further eroding borrowers’ equity and the economy has entered recession,” said Brown.

Meanwhile, home buyers are staying on the sidelines. Home sales are weakening across the country as demand cools, early results from local real estate boards for October revealed last week.

Home sales in Toronto, Canada’s biggest market, have now sunk to a level only seen during the past two recessions, said economists with National Bank of Canada.

Prices are also beginning to soften in Ontario and British Columbia, said RBC economists. The MLS Home Price Index in Toronto has declined month over month in the past three months and in Vancouver and Fraser Valley, the index in October fell for the first time since March.

“We expect these trends to persist through the remainder of the fall season,” said RBC economists Robert Hogue and Rachel Battaglia.

“We think buyers will stay on the defensive in many parts of Canada despite more choice becoming available to them. High interest rates, ongoing affordability issues and a looming recession are poised to pose major obstacles.”

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Geopolitical risks now top the list of worries for businesses, according to the latest reading of Oxford Economics global risk survey.

The fourth-quarter survey launched just days after the start of the Israel-Hamas war was dominated by wide-ranging geopolitical concerns. Almost two-fifths of businesses view the conflict in the Middle East as a very significant risk to the global economy over the next two years, said Oxford. However, concerns about China-Taiwan tensions were also widespread.

Overall, geopolitical risk is cited by 46 per cent of businesses, up 10 percentage points from three months ago.

• Bank of Canada Deputy Governor Kozicki speaks in Ottawa
• Quebec Fiscal Update
• Canadian Manufacturers and Exporters hosts its 2023 National Manufacturing Conference and Annual General Meeting in Ottawa
• Today’s data: Canada international merchandise trade, U.S. Goods and Services Trade Balance, U.S. Consumer Credit
  
• Earnings: Ballard Power Systems, Cargojet, TransAlta, Pet Valu Holdings, Pan American Silver, Intact Financial, Gilead Sciences, eBay
• Get all today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

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• Everybody loves/hates Raymond, a thriving, net-zero town in oil-rich Alberta
  
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Changing jobs and switching between defined-benefit and defined-contribution plans make it challenging to determine future retirement income. Certified financial planner Allan Norman says both plans are good, but quite different, so it’s important to pay attention to the variations in each plan. Find out more from FP Answers

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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