Canada’s Housing Market- Ready to implode!

Despite what the mortgage companies and loan-sharks tell you: All’s NOT hunky-dory with the Canadian real estate scene. Even the government, at all levels – Federal, Provincial, Municipal – are trying desperately to put on a brave face on the impending market correction. However, the numbers never lie.

Here’s why many analysts believe that Canada is heading for a housing bubble crash that could be much bigger than what our neighbours to the South experienced in 2008-09!

Facts and figures

When Royal Bank of Canada (RBC) pushed out its Housing Affordability indicators for Q4-2017 a short while ago, it indicated that there was some improvement in the average Canadian’s ability to afford a home. This was the first good news in over two years. RBC’s Canada-wide affordability indicator stood at 48.3% in Q4 2017, compared to an average of 39.4% since 1985.

So, what do these facts and figures mean? Well, in simple terms: Higher is bad. Lower is good!

48.3% means that, for the average Canadian household, 48.3% of their household budget will be consumed on home ownership spending. That includes utilities, property taxes (not to mention HST/GST and other taxes) and yes – especially mortgages! Back in 1985, only 39.4% of a household’s income went towards affording a home. To put things in perspective then, Canadian’s spend 48.3 cents, on the average, out of every dollar they earn on housing affordability.

Posing a rhetorical question: “Are we at a turning point for affordability?”, the RBC report offers us this gloomy outlook for Canada’s real estate market:

“No... Rising interest rates will put upward pressure on home ownership costs, and recent policy measures are more likely to reduce household and market risks than provide material affordability relief”

In case readers didn’t catch that bit about “affordability measures”, RBC was referring to a slew of measures various levels of government have put in place since late 2017-early 2018, to try and curb the ever-ballooning housing crisis. These measures include Non-Resident taxes, Renter protection steps, and legislative moves to increase housing supply. There have even been Federal government pledges of $5B to help housing affordability.

Well, it appears that the facts and figures crunched by RBC confirm what many analysts suspect: All those “measures” won’t do much to forestall an impending housing market crash in Canada!

More bad news

In case you might think RBC has a hidden agenda (whatever it might be!) to sound gloomy on Canada’s housing market – think again! There’s more bad news in the cards for Canada’s real estate sector, and this time it’s a competitor of RBC putting it out.

National Bank of Canada (NBC), in its Q1 2018 housing affordability report, confirms the conclusions arrived at by RBC. But the NBC report sheds more gloomy light on what’s to come. According to NBC, Canada’s housing affordability situation further deteriorated in Q1 2018, with mortgage payments on the average home increasing by 1.2 points. According to NBC analysts, this bad news story has continued to get worse over the past 11 quarters.

And, if we read the report correctly, affordability challenges could have a deleterious knock-on effect on the broader housing market:

“Since buyers can hardly lay out a higher share of their income on housing…, a decline of prices is conceivable over the next few quarters if rates rise as we expect.”

 

Not so hidden in the report, was a dire warning that as bad as things are today – on the affordability front – it is likely to get worse when (not IF!) the Bank of Canada (BoC) increases its benchmark rate. The bad news for existing mortgage holders and prospective homebuyers is:

  • You are currently spending nearly half of your pay check trying to afford your home
  • When the BoC raises its overnight lending rate, your mortgage holder will likely follow suit
  • You’ll then need to divert more of your pay check towards housing affordability
  • If you can’t afford to pay that mortgage, you may have to borrow more money (at higher interest rates!) to make those payments
  • And…if you can’t borrow more, you’ll likely lose your home!

Whichever way you interpret each of these (RBC and NBC) reports, the messages are clear: What’s to come in the next few quarters will likely dwarf the 2008-2009 financial crisis by a huge scale. That’s because this isn’t just a matter of rising mortgage rates – it’s broader than that.

The big ugly picture

Canada is facing an unprecedented increase in household debt. Every time there is a policy statement by the BoC, one red flag that is continually waved is household debt levels, and the devastation that could wreak on Canada’s economy in a rising interest environment.

According to the Canadian Banker’s Association (CBA), almost 69% of that debt represents residential mortgages. So, if we were to step back a bit and consider what would happen if even half of Canadian’s (owing a mortgage) were to default? It would spell disaster! Why? Because most Canadian’s would likely be forced into bankruptcy!

According to one report, more than half of our population can barely afford a spike of more than $200 in monthly expenditure, before they are unable to pay their bills. So, what could a small increase in interest rates – say one percent over the next year or so – do? It could be manageable – right? Not really!

The big ugly truth is that a 1% spike in interest rates is estimated to translate into $130 per month additional in Canadian debt-servicing costs. And that would mean that the average Canadian has just $70 worth of wiggle-room in their budget, before they throw in the proverbial financial towel. And all because they will not be able to afford their mortgage or service other non-mortgage debt.

Plain speak

To put things plainly, most lenders and politicians have a vested interest in skewing the facts towards supporting a housing recovery story. However, if you read between the lines of every impartial analysis, you’ll come to a dire conclusion that the government and mortgage companies are trying to hide:

Canada is headed for a huge housing bubble implosion – and it could be a nasty one!

Comments

Davidduke2000 Wed, 07/11/2018 - 20:36 Permalink

since 2008 when the us housing market collapsed while the Canadian market was still intact, the so-called american experts have been singing the same song, it has been 10 years now and the Canadian market did not implode and is not showing any signs of implosion.

Space_Cowboy 107cicero Thu, 07/12/2018 - 11:30 Permalink

It will truly make my day when I see Chinese investors panic selling their US and Canada based real estate as it plummets in price.  (No offense to US/Canadian homeowners)

I've heard from a business colleague that was in touch with a luxury real estate agent out of Miami that was in the industry for over 15 years, and left this sector around 3 to 4 months ago.  From his perspective he said luxury real estate is already dropping (canary in the coal mine), and the global housing bubble pop will start in the Canadian housing market and spread from there.  His take that would be 6 months from when he shared that, which again was around 4 month ago.

I don't put this forth as gospel, but definitely an interesting perspective.

In reply to by 107cicero

Kayman Space_Cowboy Thu, 07/12/2018 - 13:20 Permalink

The only thing that kept the Canadian economy flush was the Chinese money flowing out of Hong Kong, Singapore and Mainland China. Canada has an archipelago of Chinese communities where the vast majority don't speak English.

If the Chinese economy slows as quickly as the Shanghai is falling, all the "nominal" Canadian shadow holders might be called home. Then and only then, will real estate collapse.

 

In reply to by Space_Cowboy

SRV 107cicero Thu, 07/12/2018 - 13:16 Permalink

But since nothing is selling the Toronto RE Board has switched focus to condos... prices are spiking, and they are pushing owners to demand unreasonable searches on renter history (worse than any home I've ever bought), and have driven rents up 30%.

Single home, and even townhouse, markets are dead!

In reply to by 107cicero

TheSilentMajority Mr.Sono Thu, 07/12/2018 - 03:28 Permalink

Normally that would be the case.

However, Chinadastan imports over 300k people from shitholes each year, and they all need a place to live.

in addition, a massive and seemingly neverending flow of dirty money from China, Pakistan, India etc continues to flood the real-estate market. Any drop in prices or the looney just encourages even more illicit funds to go to Chinadastan real estate.

 

In reply to by Mr.Sono

August Justin Case Thu, 07/12/2018 - 15:20 Permalink

>>>The U.S. will not provide jobs....

People really do need to "provide" their own jobs.  Still, the US government very actively screws its own working population by pushing phony "healthcare", phony "defence", phony money, phony budgets, and phony immigration controls. 

So, yeah, the USA-as-we-know-it will be undergoing some radical and entertaining changes in the near future.

In reply to by Justin Case

personal109 TheSilentMajority Thu, 07/12/2018 - 12:35 Permalink

Hey, I grew up in Canada, parents emigrated from India, now live in California.  I completely agree with you, India is one shithole of a country.  By 2030 40% of Indians won't have safe drinking water!  They are all coming to friken Canada and the US because corrupt governments and companies want cheap IT labor.   Same goes for China.  Brother, I completely agree with you.

In reply to by TheSilentMajority

new game pitz Thu, 07/12/2018 - 05:26 Permalink

was this article written for average 8th grade education?

tyler, are you dumbing it down with allowing dumber shit on this site?

also, in general, fuk canada. the neighbor that needs to fuk off and stay on your side.

keep your shit north and keep the commie shit in your backyard.

pffft, can't even own guns up there. what a fuking joke. fuking fags.

hunt much? 

In reply to by pitz

swmnguy mikka Thu, 07/12/2018 - 09:54 Permalink

Indeed, the silly US gun propaganda as usual defies reality.  Canadians own more guns per capita than Americans do.  Yet they have virtually no gun violence the way we do in the US.  Of course, Canada also doesn't have the tradition of pretending class and race issues don't exist, and using violence as a first resort in disputes.

In reply to by mikka

zuuma swmnguy Thu, 07/12/2018 - 11:12 Permalink

indeed.

A certain group has a cultural tendency to act impulsively & violently for any little dispute.

If Canada imported about 4 million of them, or so, you could enjoy identical violence statisics as the USA.

I do see that you are on track to doing that with your "refugee" program.

 

Also, kudos on those well-attended AR-15 & Pistol shooting leagues throughout Canada.  Fantastic scores all around. /sarc

 

In reply to by swmnguy

Kayman swmnguy Thu, 07/12/2018 - 13:34 Permalink

swmnguy

No. Canada was better at killing Native Americans softly, with disease and starvation, rather than with guns. 

And "Canada" didn't ask their "First Nations" if they would like millions more 3rd world welfare cases on the land.

Yeh. Canada, the nation of over-taxed private sector workers and  UberMensch government employee unions- especially the Health Care Monopoly sector.

In reply to by swmnguy

Kayman bluskyes Thu, 07/12/2018 - 13:38 Permalink

The Canada Propaganda Media kept the lid on bailouts of the Canadian banks. Everyone of them was insolvent until the government had their mortgage arm buy up billions of mortgages for cash. And every Canadian bank got help from the U.S. Fed.

"But we're different", "But we're not American". The 2 legs Canada stands on, on a 3 legged stool.

In reply to by bluskyes

Dragon HAwk Wed, 07/11/2018 - 20:37 Permalink

Only a bank could foreclose on all of the properties on their books, sell them all back to the original owners at half the price and still make money.

pitz Dragon HAwk Wed, 07/11/2018 - 21:12 Permalink

The CMHC is legally obliged to make up the difference between the mortgage and the liquidation price in the case of most at-risk Canadian mortgages.  

And mortgages that are sold back to the previously insolvent original owners at half the price probably would carry dramatically higher rates of interest.

The only question for Canadian bank shareholders is will the Government of Canada recapitalize the CMHC without imposing a surtax on the bank profits for such?  

In reply to by Dragon HAwk

chippers Wed, 07/11/2018 - 20:51 Permalink

  As the Canadian economy is based on importing ever increasing hordes of 3rd world "consumers"  I personally doubt it will collapse.  There are still a billion Indians and Pakis that haven't moved yet.

opport.knocks Wed, 07/11/2018 - 22:48 Permalink

We still have a ways to go yet. There is so much pent up demand for home ownership among the millennials that correctly priced middle class homes are still being snapped up in Toronto. If the home has a basement apartment, so much the better.

This will be the last rate increase from the BoC for a while.

What does it mean for me? If the author's thesis is correct and home prices go down further, my rental unit still pays all my mortgage free housing expenses.