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!