Mortgage defaults in Canada have jumped significantly from historic lows, creating new market dynamics that are pulling down home values across entire neighbourhoods, according to a mortgage industry expert. While default rates remain below historical averages, the ripple effects are becoming increasingly visible in Ontario’s housing market.
The Hub spoke with Ron Butler, a mortgage broker and industry analyst, to better understand the current state of mortgage stress and its impact on Canadian real estate markets.
Here are five key takeaways from the conversation:
1. Mortgage defaults are rising but remain manageable: While 90-day defaults have increased substantially from COVID-era lows, they’re still running below the historical average of 35-36 basis points.
2. Power of sale creates neighbourhood-wide price pressure: Foreclosed properties establish new, lower comparable sales that drag down values for entire districts, contributing to real price declines.
3. Small condominiums face a “horror show”: Units under 550 square feet are experiencing devastating price drops.
4. The condo crisis may be spreading: What started as a Toronto-area problem appears to be affecting Calgary’s condo market, where buildings were largely purchased by Toronto investors rather than local buyers.
5. Bond market uncertainty reflects broader economic concerns: Rising bond yields despite Bank of Canada rate cuts signal market skepticism about mounting government deficits and sovereign debt sustainability.
Mortgage defaults are rising, but remain manageable
The surge in mortgage defaults represents a significant shift from the ultra-low levels seen during the pandemic, when defaults “almost went to zero,” Butler explained. However, he emphasized that current levels don’t constitute a crisis.
“It’s absolutely not a panic,” Butler said. “90-day default is still, even to this day, below the historic average.” The increase reflects a normalization from an artificially suppressed baseline rather than a systemic breakdown in mortgage performance.
Power of sale creates neighbourhood-wide price pressure
The most significant impact of rising defaults may not be the foreclosures themselves, but their effect on surrounding property values. Butler highlighted how power of sale properties establish new market benchmarks that affect entire communities.
“If you’re a homeowner close to one of these power of sale situations, you just got a new value as soon as that house sells,” he explained. “These power of sales create a new comparable for the whole district, for the whole area, the neighbourhood. And that essentially pulls your value down too.”
This dynamic helps explain why some Ontario and British Columbia markets are experiencing “very real” price declines after previously showing resilience.
Small condominiums face a “horror show”
The crisis is most acute in Toronto’s smallest condominium units, which Butler described as a continuing “disaster.” He cited a particularly stark example from Oakville, where a builder recently sold remaining inventory at $675 per square foot—units that original buyers purchased five years ago for $1,100 per square foot.
“It’s just a shameless destruction of their value,” Butler said of the impact on original purchasers. The situation is so severe that it may jeopardize some buyers’ ability to secure mortgages for properties that haven’t yet closed.
Butler noted signs of “capitulation” in southern Ontario’s market, where sellers are finally “pricing accordingly” if they need to sell.
The condo crisis may be spreading
While low-rise housing markets remain relatively stable, Butler warned that condominium problems may be expanding geographically. Calgary’s condo market is showing similar stress patterns to Toronto’s, with buildings “almost exclusively purchased by people from Toronto and not enough people from Alberta.”
“The virus of the condo crash seems like it might have jumped provinces,” Butler observed, suggesting the investment-driven demand that inflated Toronto’s small condo market may have created vulnerabilities elsewhere.
Bond market uncertainty reflects broader economic concerns
Despite the Bank of Canada’s aggressive rate cutting, bond yields have risen—a dynamic Butler attributed to growing concerns about government debt sustainability. He pointed to mounting deficits across developed nations, including an expected “gigantic deficit” announcement from Canada in early November.
“There’s just a degree of uncertainty amongst bond traders as to whether this path is sustainable,” Butler explained. While he estimated the probability of a sovereign debt crisis at only 12-15 percent, this represents a significant increase from roughly 1 percent just a few years ago.
This “bond vigilantism” helps explain why mortgage rates haven’t fallen as much as the central bank’s policy rate cuts might suggest, limiting the housing market’s response to monetary stimulus.
This commentary draws on a Hub podcast. It was edited using AI. Full program here.
