The debt TSUNAMI

As Canada's banks prepare for a wave of mortgage defaults, some economists warn an impending credit crunch could hurt us all

- CLARRIE FEINSTEIN

The mortgage crisis has hit Toronto homeowners hard. Household debt is near record levels and unemployment is inching upward, creating a precarious environment for over-leveraged homeowners.

Already, some are losing their homes. Mortgage delinquencies and defaults are expected to continue trending upwards as homeowners face mortgage renewals in 2025 and 2026. Canada's banking regulator recently named mortgage renewal as one of the top financial risks facing the country. And the six major banks are bracing for more defaults, setting aside $4.36 billion in provisions for credit losses in the second quarter of 2024 - an increase of $16 billion from the same time last year.

While the crisis will be devastating for homeowners facing financial hardship, the fallout won't end there. As more homeowners default, the banks will be forced to put more capital aside to cover bad loans, creating the risk of shock to the lending system.

Worst case, it will force banks and lenders into a credit crunch a decline in lending activity brought on by a sudden shortage of funds, economists say. Canada already has the third-highest household debt in the world and as it becomes harder for people to access credit from the banks, the economy could slow-possibly even leading to a recession, according to some economists. Businesses will cut back on operations and trim their workforce while households spend less, unable to borrow more to make ends meet.

"The train wreck might happen in 2026, however, I think the train heading for the wreck has already left the station," said David Rosenberg, founder and president of Rosenberg Research & Associates, an economic research firm.

"We have unprecedented debt in the household sector bumping against interest rates rising to levels not seen in 23 years. What that triggers, and there's no turning back from, is a delinquency cycle and credit crunch. That's what's staring us in the face right now."