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Canada: The land of hockey, socialized health care, and maple syrup. That’s the stereotype, anyways. But people who actually live in this country know that this gross over-simplification of our culture misses a very important piece: Complaining about real estate prices.
Seriously. Canadians love complaining about real estate prices. It’s our national past-time. We’re somehow simultaneously obsessed with owning houses, while complaining bitterly about how much they cost. In fact, in the last federal election, the number one issue that mattered the most to Canadian voters was reining in housing prices. Not dealing with the pandemic that was still going, but housing prices.
Well, as they say, be careful what you wish for.
In March, the Bank of Canada, started raising their key benchmark rate in order to deal with rapidly rising inflation. This in turn caused mortgage rates to go up. And this, in turn, caused housing prices to go down.
In some areas, quite dramatically. While the downtown cores of the major cities are only starting to see their prices slip, the suburbs where people flocked to during the pandemic thinking that they’d never have to commute to work again are seeing the steepest price drops.
In the Maritimes, for example, prices in Nova Scotia and New Brunswick are expected to fall 20 per cent over that timeframe. Ontario and Prince Edward Island could see drops of 18 per cent, with British Columbia giving back as much as 15 per cent.
How much will home prices drop as interest rates rise? Depends where you live. GlobalNews.com
So here we are. The long awaited housing correction has finally arrived. And interestingly, the same people who were complaining that housing was too expensive are now panicking as they see their home values plummet. After just two rate hikes, nearly half of Canadians think that the central bank has gone too far and want the rate hikes to stop right the Hell now.
Well, too bad. The genie’s out of the bottle, and there’s no putting it back in. Tiff Macklem, the Bank of Canada governor has said in no uncertain terms that the rate hikes will continue until inflation is tamed, and if it means tanking the housing market in the process, then so be it.
At the news conference, Mr. Macklem repeatedly stressed that the central bank’s priority is getting consumer price growth under control, even if that meant a cooldown in the housing market.
Bank of Canada warns high household debt and elevated home prices pose top risks to economy. TheGlobeAndMail.com
So this begs the question: Is it possible for the falling housing market in Canada to turn into a US-style Great Financial Crisis?
Let’s find out, shall we?
Why We Might Be Screwed
I’m generally not the alarmist type, but as I was conducting my research for this article, quite a few troubling parallels started to appear with our housing market and the US housing market circa 2007/2008.
As Canadians, we love comparing ourselves to Americans and feeling smug about ourselves (another often-overlooked part of Canadian culture). Whether it’s health care, gun control, or just about anything else Fox News screams about on a nightly basis, we love convincing ourselves that we would never be dumb enough to make the same mistakes that the Americans made.
Well…
Canadians Are In Epic Amounts of Debt
In the run-up to the Great Financial Crisis, Americans famously bought waaaay too much housing, and a Bush-era government that systematically deregulated the real estate market made it worse. Right before the crash, Americans famously had a household debt-to-income ratio of 120%, meaning that for every dollar they earned, they had $1.20 they owed. It doesn’t take an economist to tell you that’s a recipe for disaster.
Bad news. Canada is even worse.
Despite all the warnings from our government, despite our supposed risk aversion, and despite the giant cautionary tale south of our border, Canadians borrowed money like never before during the pandemic.
As central banks around the world dropped interest rates to keep the economy from falling over a cliff during the pandemic, we went shopping.
Canadians bought more real estate and got into more debt than ever before in our nation’s history, and we are now sitting on a national debt-to-income ratio even worse than the Americans.
Source: Household Debt To Gross Income in Canada, Tradingeconomics.com
That’s right. We took America’s 120% debt-to-income ratio that sank their economy and raised it all the way to 180%.
We’re number one! We’re number one!
We Have Rate-Reset Rate Loans
Another off-cited reason about why Canada is “so much smarter than the US” is the fact that the Americans had these weirdo mortgages that somehow reset higher after a few months of low teaser rates. What a stupid idea! Good thing we don’t have those up here!
Except we sorta do.
While it’s true that our normal fixed rate loans don’t change with interest rates (except at renewal), and it’s also true that our variable-rate mortgages tend to react to higher interest rates by lengthening their duration rather than increasing their payment, there is a type of loan that’s been gaining popularity that does reset their payments.
HELOCs.
Home Equity Lines of Credit used to be a relatively esoteric financial instrument that most people didn’t know about, and even fewer people had, like reverse mortgages, but over the past few years they’ve exploded in popularity.
The reason? You guessed it, high real estate prices.
As housing became more and more unaffordable, millennials started doing what millennials did best. No, not make TikTok videos about avocado toast.
They whined to their parents.
Unable to scrounge up the cash to meet even the minimum down payment requirements, their parents took out HELOCs from their paid off, price-appreciated homes to gift to their kids so that they too could experience the joys (?) of home ownership.
HELOCs, by the way, are floating rate loans. And because HELOCs don’t have an amortization that can be extended, their monthly payments simply adjust upwards with rising interest rates. So as the Bank of Canada hikes their benchmark, anyone with a HELOC in this country are seeing their payments go up…and up…
We Have No-Recourse Loans Too!
The final piece of the puzzle that made the US housing crash so terrible was the fact that many states allowed something called no-recourse loans. Basically, a no-recourse loan meant that if a homeowner defaulted on their mortgage, the bank can foreclose on their house as normal, but if that house was worth less than the mortgage, the bank couldn’t go after the mortgage holder’s other assets.
In a falling real estate market, this encouraged people who were in an underwater mortgage situation to simply abandon their homes knowing that the bank couldn’t do squat to them, which caused banks to start haemorrhage money and turning a housing crash into a full-on financial catastrophe.
What a stupid idea, right? Who’s the idiot who let that happen? Clearly, we as Canadians would never allow something like that to proliferate here, right?
Alberta allows no-recourse mortgage.
Jingle mail — the act of walking away from an underwater mortgage by mailing your keys back to the bank — is a peculiarity of the Alberta residential market.
Jingle mail rears its ugly head in Alberta, CBC.ca
I know, I know. I was just as surprised as you presumably are when I found that out.
So let me get this straight. We knew no-recourse loans were a bad idea, we saw what they did to our southern neighbour, and we still didn’t get rid of them?
Why We Might Be OK
Now, I admit, the above reasons sound pretty bad. I don’t always know which direction an article goes as I write it, but I also found some pretty encouraging silver linings that might indicate that we may not head down the path of a US-style recession. Wanna hear them? Yeah, you do.
Alberta Already Had Their Housing Crash
So, first, the Alberta thing.
I admit that I was pretty shocked and disappointed to learn that one of our provinces learned nothing from the debacle in the US and had set up a situation where something similar could happen here. And as we know, once a housing crash transforms into a financial contagion, that contagion can metastasize everywhere.
With the right conditions in Alberta and aggressive rate hiking from the feds, there’s really no reason why a housing collapse can’t start there. Except for one thing.
Alberta already experienced a housing crash.
It was back in 2015, when the Saudis decided that the whole “US drilling for their own oil” thing wasn’t funny anymore and tried to knock the frackers out of the market with a good old fashioned price war. They pumped like crazy, flooding the energy markets with cheap oil, and drove its price down from above $100 all the way down to $40 a barrel.
Alberta, unfortunately, got caught in the crosshairs.
The Alberta oil sands have always been trickier to extract from than a normal well, so when oil prices plunged below their cost of extraction, mass layoffs resulted, which then caused housing prices to crash.
Oil prices have since recovered, but that psychological damage persists to this day. Albertans learned real fast that housing doesn’t always go up, and real estate in Calgary and Edmonton are still way cheaper than other similarly sized cities as a result.
But that also means that the housing bubble mania that has swept through most of the country doesn’t exist in Alberta to the same extent. That makes Alberta not the systemic risk that it could have been.
Banks Are Earning More Money
Here’s another major difference between us and the US. As real estate corrects, our banks are making more money, not less.
Unlike the US, where the housing crash was caused by a lot of bad lending habits all catching up with the lenders at once, ours is caused by rising interest rates. Higher interest rates mean higher mortgage rates, which might be bad news to current mortgage holders, but you know who loves higher mortgage rates? The banks.
Not only did every single of our major banks report stellar earnings this last quarter, but many of them also raised their dividends.
And just recently two of our biggest banks, CIBC and Scotiabank, announced that they were increasing the salaries of the majority of their workforce.
None of this paints a picture of a financial system in distress. Quite the opposite, actually. Banks don’t raise dividends and salaries when they’re worried about the future. They do that when they’re anticipating making so much money they don’t know what to do with it. Collectively, our banks are estimating that the increased interest rate will result in a net increase in profitability to the tune of over $1 billion.
Banks tend to earn higher interest income when interest rates rise. That is partly because they are able to charge wider spreads between deposits and loans, but also because they earn a better rate of return on financial assets they purchase with the deposits and other funds they hold.
Canada’s big banks expect billions in added income following interest rates hike, TheGlobeAndMail.com
And they reason they’re so optimistic is because…
Jobs, Jobs Jobs
Our job market remains clicking hot.
That’s actually a major difference between Canada and the USA in 2008. Remember, the US housing crash only became a Great Financial Crisis when people started losing their jobs and defaulting on their mortgage payments. The wave of defaults overwhelmed the financial system, and that’s when the really bad stuff started happening.
But rising mortgage rates in and of themselves is not sufficient to cause a contagion. If the job market remains robust, then the effect of higher interest rates will result in more of each home owner’s paycheque going towards their mortgage. That’s going to suck for the home owner since it feels like they’re getting a pay cut, but as long as they don’t default, the banks don’t lose money.
Quite the opposite actually. They get to make more money from those poor suckers and then distribute those extra profits to shareholders in the form of increased dividend payments!
So as long as the job market doesn’t fall over and people can afford to keep paying their mortgages, it’s possible that a housing crash in Canada won’t result in a repeat of 2008.
Conclusion
Now all this being said, nobody has a crystal ball. Our ability to avoid a recession hinges entirely on the strength of our labour market. The biggest danger to what the Bank of Canada is doing is that if another unexpected world event impacts our job market and starts causing that unemployment rate to tick up before we’ve gotten inflation fully under control, we’re going to be in real trouble. Then the government will be forced to choose between stubbornly high inflation or mass unemployment.
However, right now that’s not the choice we have to make. Right now, the bank has to choose between tackling inflation or keeping the housing market inflated, and in that decision the bank has clearly decided to tackle inflation even it if means the housing market gets whacked.
This is the right decision. Increasing interest rates hurts recent homeowners, especially those that bought during the pandemic at inflated prices and are holding mountains of debt. But not increasing interest rates means inflation will continue to hurt everybody.
Basically, our central bank has chosen to sacrifice over-leveraged home owners and speculators into the jaws of inflation in order to save the rest of us.
Depending on which side of that equation you’re on, you might have very different opinions on whether this is fair, or the right thing to do, but either way, let’s hear what you think in the comments below!
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Great article. Curious to your thoughts on how these rate rises will impact the cost of rent? Will landlords try to push these costs directly onto tenants? Will this create further inflationary housing pressure for non property owners?
Landlords will definitely increase rents in response. We just got a notice of a rental increase even though we had one last year as well.
It is normal the get a rent increase every year. Landlord expenses go up too and in many cases they hold mortgages that their rental income must cover. Property taxes and maintenance go up for them too, as well as, in many cases, electricity, heating, A/C, and water. All that must be passed on to the renter. No one gets a free ride nor should they.
If your rent is going up (especially higher than the rate of inflation) and you are a good tenant, ask the landlord for a break. I did that for the 6 years I was renting and was successful in keeping my rent the same every alternate year.
If you are a good tenant that pays their rent on time, it makes sense for the landlord to limit the rent increases rather than risk losing you because when you leave, they will lose at least one month’s rent to renovate the premises. Depending on how much it cost them to undergo the renovation, it can take them years to recover those costs. It’s cheaper to just keep you with a lower rent increase rather than risk signing up a bad tenant to replace you.
In the event that you must agree to a rent increase, ask the landlord to renovate something for you; a paint job, new flooring, a new faucet, etc. They would likely agree to that kind of work since they would eventually have to do it anyway. So why not try to benefit from a rent increase?
You’re making a lot of assumptions; we’ve never had nor are we looking for a free ride.
We’re good tenants (4 years), always pay our rent on time, and don’t bother our property manager except for rare emergencies. We do the maintenance on the home, pay all the utilities, and deal with the trades directly any time something is needed. The house is old and poorly insulated so our heating/power bills are very high.
At our inspection the manager said she’s very pleased with how we keep the home. However, when we asked if they’d fix some linoleum that’s been lifting from the kitchen floor (which we tried to fix ourselves and is a tripping hazard) they said they would increase the rent to do so. We said never mind but they still increased the rent.
Property taxes actually went down, there’s no mortgage on the house, and we don’t see or hear from our landlord except to receive a rent increase notification in the mail. A little customer service goes a long way.
My comments did not make any assumptions about you. And I definitely did not intend to suggest that you were seeking a free ride. I was merely stating that everybody must share in the financial challenges.
My comments were intended to give you and others ideas of how to minimize your rent increases.
If you are paying for repairs, present your receipts (upon your renewal) to the property management to remind them that you are absorbing some of the costs that they should be covering. Also, remind them that you never make late payments. That’s right, negotiate by selling yourself just as you have expressed to me above. It is much harder for them to say no to you face-to-face.
Lower property taxes are unusual and most likely temporary. But there are other costs that the landlord is responsible for. Property insurance on the building is going up every year and getting worse as more claims from storms (particularly water damage) are submitted. I would guess that the insurance on the building is well over $1000, (maybe double) annually especially if the building is very old.
The truth is that if the landlord cannot make money from your tenancy, they have no reason to keep the building, They can sell it and buy another investment. And the buyer may just want to renovate it and live in it themselves.
They can try, but depending on the regulation in your state/province there may be limits as to how much they can do that. Here in Ontario, for example, most existing rentals can only increase by 1.2% in 2022. Anything more than that, they have to apply for approval from the LTB, which is horrendously backed up.
So check with your local regulatory body. Landlords depend on tenants being ignorant about their rights in order to take advantage of them.
Usually with interest rates going up that leaves more people that are unable to get approved for mortgages…. this then means there are more people renting so rent prices go up unfortunately.
No concerns regarding this. I have a balanced and diversified portfolio. Dividends keep chugging along and cover all my expenses in a tax efficient manner. I did own a home up to early 2017 but sold it. If/when home prices drop to a level I think is appropriate, I’ll potentially buy one again if it fits my lifestyle at that time. Sell high and buy low. Also, cashflow is king so own stuff that pays you to hold them. You can’t go wrong.
Great timing. I’m also in counting dividends come in even as the real estate market collapses, and I gotta say it’s pretty great 🙂
Excellent article about the potential disaster that is unfolding and which the media is not discussing much .
Actions have consequences as a lot of people will find out.
Lots of negatives for Canada in a world wide recession where the trillions in excess helicopter cash are drying up fast and mortgage rate targets publicly stated by central bankers will be 8-9%.
Not sure the extra thousands of service McJobs in Canada will help.
But bankruptcy laws in Canada are much harsher than US, so the Canadian banks will legally pursue debtors and their estates for years to get the very last cent they’re owed.
Also anyone who has FIRE plans should think again as a 101K will not pay the bills but a lousy job will
I hope the banks do pursue deadbeat debtors to the grave, it’s bonkers that the US let them get away from walking away from their mortgages anyway.
Do you know how debt to income ratio is calculated? Is that on a monthly basis? If so, that is bonkers.
I believe it’s total aggregate debt over annual gross income. So some people owe way less, some owe way way more, but 180% is on average over the entire population.
I could be misremembering, but my recollection regarding no-recourse loans (in most no-recoarse states) is that it applied only to the first mortgage, but not the second (i.e. HELOC’s, second mortgages, etc). So in theory the bank (or debt collector if loan sold off) can come after the homeowner for any deficiency on the second mortgage. In practice this never happens being that homeboner is usually on the way or already deep in bankruptcy, so the homeboner ends up getting 1099-C’d (debt formally canceled, which is a taxable event).
Incidentally, I recall an old friend of mine who was a bankruptcy attorney back around 2010/2011. He said that most of the bankruptcies he handled were amateur RE investors who were buying up foreclosures. Back then, paperwork and titling were a complete mess, and many of these “investors” bought foreclosures, only to learn later that there was still a massive second mortgage attached to the property…these poor SOB’s would throw up their hands and say “F-It !!”, and bankrupt out of their mess.
Yikes, that sounds like a mess. We may end up seeing something like that as a lot of our RE is owned by speculators/investors who don’t understand the complexity of the paperwork they sign when they create these debt-financed house of cards…
36% of Canadian homeowners are mortgage free. 32% still have mortgages that have to pass a stress test. The job market is still healthy. I suspect Canada will be very ok when the shit hits the fan so to speak. People with heavy debt will feel some pain though. Lol
Great post. Thanks for all the great article you guys write. Keep them coming!!!
People with a lot of debt need to feel some pain. They thought they were invincible for far too long. Ain’t nobody above an ass kicking.
As an Edmonton landlord I will definitely raise the rent ASAP. I could raise it 20 percent and it would still be less than it was 6 years ago! The rental market here has been brutal for owners. On top of that my condo fees went up 15 percent this month.
Jeez. That sounds brutal. If you could do it again knowing what you know now, would you have bought the same place 6 years ago?
I would not. It started off as a very good investment. The rent paid our mortgage and condo fees, plus a couple hundred extra every month. Now we break about even, but only because I locked in a 1.86% mortgage rate last year. When we bought, it was for $50,000 less than a previous owner had paid. Yes, we got a 1 bedroom condo in excellent condition, in a well-managed building, in Edmonton for $90,000. We looked into selling it a couple of years ago when rents had bottomed, and learned we would get around $50,000 for it so we held on. This Edmonton market is not Toronto or Vancouver! It will all end up okay, but I could have invested in stocks and done much better with far less stress.
It’s telling that for the last decade or so the media has posted headlines about how real estate prices were out of control (and that’s true). Now that a much-needed correction seems to be beginning, the sky is apparently falling because prices are dropping. It’s always about peddling fear.
I hope that central banks and governments hold firm in doing what needs to be done; I’d hate to see the same people who made tax-free fortunes now get bailed out just because they cry about seeing their unearned equity erode. Markets giveth and markets taketh away, that’s how it’s supposed to work. Deciding to buy a 6 or 7 figure house entails risk, and it’s a risk that should be shouldered by the people who made the decision to buy.
I saw my home go up about 50% in the 4 years I’ve had it. That’s not extreme compared to some parts of the country, but it’s still unsustainable long term. I have no problem with it being rolled back if it means that new buyers will still be able to enter the market and that real estate won’t be the main focus of normal people’s lives. A house should primarily be a place to live, not a tax-free ATM.
On the plus side for me, I just lucked into renewing at 2.89% for a 4 year fixed, which is actually a little cheaper than what was available in 2018. For the time being I’ll continue paying a $1,200/month mortgage to live in a 3 bedroom house on a half acre of land that my spouse and I will eventually own free and clear.
“A house should primarily be a place to live, not a tax-free ATM.”
EXACTLY. I still think it’s unfair that capital gains on real estate isn’t taxed while cap gains on every other asset is, but hey I guess that’s why I’m not a politician.
Great article!
This mess is the BoC’s fault and they should be downsized to a skeleton staff!
Then set their rate primary adjustment dates to the day after the US Feds dates. Follow the leader with a slightly higher rate to attract investment.
Secondary rate adjustments should be done monthly with increments as low as 1/16 of a point based ONLY on target inflation and employment numbers. No politics just data
It’s actually more Putin’s fault than anyone else’s. The pandemic-related supply chain issues probably would have resolved themselves over time, but now that the war has made gas so expensive, central banks HAVE to respond with higher interest rates.
I sold my condo a few weeks ago and barely broke even (after stupidly buying at the peak in 2006 – you live and you learn) so I consider myself lucky and plan to never own RE ever again (especially not a condo). I do feel sad for the poor suckers who bought during the pandemic housing boom and now find themselves over leveraged. I completely agree with everything you wrote, I would just add 1 caveat: if interest rates rise too much, aka the Fed overshoots, layoffs will start (in the US, Amazon, PayPal and others have already announced big layoffs soon) and that will also impact the housing market, certainly in the US and also potentially in Canada. So I think the picture is murky still on this.
In Canada, the qualifications for obtaining a mortgage were tightened up many years ago in anticipation of higher interest rates to prevent the disaster that occurred in the U.S. These increasing rates have just started now, but most people should be able to withstand the stress of higher mortgage payments as their mortgages come up for renewal. The worst risk for many people is job loss as that affects both owners and renters.
The biggest danger is that we had such low interest rates to begin with. If your mortgage is at 2% and it goes up 2% then you are paying 100% more interest adding approximately 50% to your overall payment. Add increases in taxes, maintenance etc this will cause bankruptcies and the banks will suffer along with the individuals. Once that starts, the knock on effect will be felt by just about everyone.
Agreed, it will affect everyone. That is all part of the economic cycle. Good times never last forever and neither do bad times. The key is to never allow yourself to live on the edge because the ever-changing economic conditions will eventually push you off.
I recall that when mortgage qualifications were being tightened in Canada, the applicant had to be able to handle the 5-year rate. So the doubling from 2% to 4% may have already been accounted for. Perhaps even higher, but I did not track what the 5-year rate was at the time.
Absolutely. Both the BoC and the Fed could screw all this up, but so far we’re still OK.
how’s the balanced portfolio’s doing? OUCH!!!!!
thank goodness im an owner!!!!!!
The problem with being an owner is that you are stuck with expenses such as property taxes, hydro, heating, and maybe condo fees, with often little potential to earn any income from your equity.
A portfolio that is geared toward earning you income will continue to do so even when the market value of the portfolio goes down. And as long as it continues to pay you (preferably dividend income and capital gains), there is no reason to sell it.
For the same reason, you would not liquidate this type of portfolio while it is rising, you would not liquidate it while it is declining either. Eventually, a well-diversified portfolio will recover; it always does even if individual stocks permanently go near zero.
Believe me, I have been there with Nortel Stock, watching it go from $200,000 to $500! (No, my original capital was nowhere near $200,000 but it was well above $500 — $40,000). Yes, that is part of the realities of investing, but you will never make money if you are not prepared to lose money and learn from the experience.
Indeed, not every investment will succeed. (I once heard Kevin O’Leary (aka, Mr. Wonderful) claim that if a portfolio manager can make money on 60% of their stock picks, they are doing well). The goal is to have more winners than losers and not sell everything during volatile times. That is the worst mistake anyone can make.
Had I done that, I would have prevented the huge losses from my Nortel investment, but I would be much further behind now because all my other investments would have been sold too, thereby missing the gains from the longest bull market in history (from 2009 to 2021).
About 10 to 20% better than some all stock portfolios right now, but yes OUCH!!! indeed. However, it does depend on your reference point/start year.
It’s still paying my living expenses without having to sell anything, so just fine.
Newsflash, but getting dividends is the same as selling equities (look it up)
all assets were bubbles. Even the stock market. Powell pulled the plug
recency bias crushing a lot of folks.
sorry. Good thing with real estate u can live in the house . Equities? not and ya still gotta pay the rent
back to back -ve SPY years would be a wake up call for a lot of folks, that recency bias will die a slow slow death. Dont quit those jobs too quick folks!!!
What you say is true, but home ownership is a much bigger money pit than you can ever imagine until you experience it for yourself. In short, you will find that your spending patterns are far more expensive as a homeowner.
In any case, even if you chose home ownership, you must still have a retirement plan.
If your retirement plan is to have no cash on hand or have all your savings locked up in GICs, you will have little retirement income to live from during your senior years. You will likely have to sell your home and use the proceeds to rent a place. That can work too, but you must have a plan rather than wing it when the time comes.
That said, your best bet is to start saving and investing in your 20s or as early as possible so that you have a 30-40 year period to let the wrinkles from bear markets of the distant past iron out themselves to irrelevance.
agreed, The Fed decreasing balance sheet and increasing rates. All equity gains from 2021 are gone. Vanished.
the assumption of 6% per yr for retirement planning comes crashing down with an ugly yr , even moreso with back to back -ve yrs as you mentioned. People have forgotten that could happen
Equities pay dividends, and dividends pay rent.
Hello,
Fundamentally interest rates are required to be raised in the overheated economy to encourage investment instead of excessive consumption. The current inflation is not the result of excess consumption but on account of shortage in supplies. In my opinion, the interest rates need to be raised to bring them at parity with the pre-pendemic rates plus marginal increase of .50% to .75% over the pre-pendemic interest rates.
Now, raising interest rates benefit banks, therefore recently government has invoked super profit tax surcharge on banks. However, this makes government richer at the expense of individuals who took out variable and HELOC mortgages.
The government should invest these revenues for affordable housing to raise housing supply to meet the housing demand.
However, if Bank of Canada keep raising interest rate steeply then it will impact not only the housing demand but also the housing investment and business investment for economical growth for the future years that coupled with highest immigration numbers will cause serious under employment and lower economic growth in the coming years.
As economist have already warned interest rate increase beyond 2.50% can have a negative consequences over Canadian economy, business investment, household wealth and employment in general leading to long recession after high inflation.
As long as governments are running deficits (and at historical highs), they are not rich. They merely have rich budgets to give us excess services that we are not paying for yet, if ever.
People who take out loans know the risks of rising interest rates.
Agreed, but they’re going to have to go above 3%. 2-3% is considered “neutral” interest rate policy. How are we going to get inflation of 7%+ under control with a neutral interest rate?
Most people do not leverage to buy stocks. If you lose 20% in your portfolio you lose 20% . Also your expenses don’t go up. If you lose 20% in you home and your expenses have gone up to the point that you default and declare bankruptcy you have lost everything.
That’s leverage for you. It’s a double-edged sword. A lot of people are going to learn that the hard way.
My theory, which has yet to proven wrong, is that no matter what happens in the world, its good for Canadian housing. It seems like every single disaster in the world, whether financial, war, pandemic, geopolitical etc Canadian housing goes up up up. This time is different though, right? Change my mind.
Canadians are just too obsessed with owning money pit houses and foreigners love to pile their money into Canada. They all feed of each other and bid themselves up. And while interest rates are going up, they still very low.
This is true, except for every 25 years when the market crashes for 10 years. Or is your perception of the 1990s different than mine?
Interest rates may still be historically low, but when they’re double what they were a year ago, that’s sure going to hurt the $50k millionaire in his seven figure house who was barely covering his expenses before his mortgage payment went up a couple of thousand per month.
If you don’t believe how quickly the herd can react, think back to 2007 when gas prices spiked and practically within weeks people were bidding up 10 year old Geo Metros to silly prices and SUVs could be had for a song. Gas prices went back down, and here we are back to everyone buying 6,000 lb trucks to go down to the store to buy some milk, completely shocked that gas prices could go up more than once in their lifetime.
Haha, so true. People have been predicting the demise of the Canadian housing market for as long as I’ve been alive. But what’s different this time is that the government has made the decision that inflation is a bigger threat than a deflating housing market.
It was nice to see after the local government in Vancouver imposed an excise tax on foreign buyers, the market cooled slightly but not much. I can’t help to think when you mention Canadians in a record amount of debt (like Americans taking out 10 year car loans now apparently), they were trying to get into a market when they couldn’t compete on the same fundamentals.
Hopefully those taxes and preferences make their way down here to prevent foreign and speculative investors from buying a home before a young family.
They really need to roll out those foreign buyers/empty homes/secondary homes taxes nationally. Homes are places to live, not investments, and the sooner we stop treating them like the latter, the sooner the housing crisis will get resolved.
I couldn’t agree more! I know some HOA are restricting buyers to occupants, however the US has been slow or resistant to put these taxes in place so the market can balance and actual residents can fairly compete.
Can’t wait to see if house prices will decline in the US and Canada. In my view, a 10-20% decline would be very healthy, but I’m still not sure it will happen.
We just had that kind of pullback in stocks and bonds and, for the most part, it has been great in removing some excess froth in the market (remember the Bitcoin, AMC and Shopify fans ? They are a lot quieter today… And even the “bonds are safe” fans got clobbered; a good reminder that bonds can be as risky as anything else…).
I wouldn’t be surprised if houses prices also fall from rising interest rates. I think this could be also positive in some ways.
But long term, prices will continue to go higher, mainly due to inflation. So, if you are not taking advantage of a pullback for buying a house, house prices are completely irrelevant.
True. In isolation housing prices going down shouldn’t matter if you’re not forced to sell, but when you add in the effect of all this debt on your monthly expenses and things get crazy real fast.
Yeah, but when you have financial assets, your revenues also goes up in % (even if there can be a negative price adjustment due to the higher interest rates).
Taking the S&P 500 for example, the PE ratio was around 22 in 2021, for a average return of 4.5%. Now, with higher interest rates, the PE ratio is down to 15.4 (see link below). So current yield on the S&P 500 is 6.5%.
https://www.yardeni.com/pub/stockmktperatio.pdf
Let say you have 3M$ in investments (eg. S&P500) and 1M$ on a mortgage at the start of 2021. And let say interest rates on mortgages went from 3% to 5%.
The 3M$ investments is now down ~20%, but the return is now 156K$ per year (3M$ X 80% X 6.5%) instead of 135K$ (3M$ X 4.5%).
The mortgage is now costing 50K$ instead of 30K$ per year in interest charges.
On a net basis (revenues minus expenses), your budget has not moved. Revenues increased by 21K$ and expenses increased by 20K$.
Obviously, that only works when you are not overleveraged. But if you only have a small mortgage compared to your overall revenue-generating assets, a mortgage can work in your favor.
Just looking at the expenses can be misleading if you don’t consider the revenues generated by investments.
I agree however that having no mortgage can give a peace of mind that no math formula can bring.
Agree with your article, Canada house pain won’t be as serious as US in 2008. There will be a subset of owners who bought in the last two years who will be hurting, but I don’t think it is large enough to impact housing market as a whole.
It’s important that as people who bought during the pandemic get their finances destroyed that we, as a society, point and laugh at them and use them as cautionary tales against taking on too much debt.
We here at Millennial-Revolution will do our part.
Very impressed with how much the Canadian housing market has gone up compared to the US housing market.
With stock markets now crashing, it seems like a RE correction is an inevitability. But I bet RE will outperform on the downside.
For most people they just on their home to live and enjoy life.
Sam
Impressed, horrified. One of the two.
I think you noted that the housing market in Toronto and Vancouver was more expensive than in San Francisco or something? That’s just nuts!