Canada's 'housing bubble' deemed close to bursting

[Nashe]

Over the past 8 months or so, the impact of interest rates on my 5-variable mortgage has been an increase of about $180 monthly. Not YIKES yet, but still, ouch.

(I say "increase" instead of "reduction in impact on principal" because I tend to bump my payments to keep me on track)

And my mortgage is not a particularly LARGE one by Canadian standards. Some people must be already hurting quite a bit.

[Innsertnamehere]

Originally Posted by Vorkuta

Over the past 8 months or so, the impact of interest rates on my 5-variable mortgage has been an increase of about $180 monthly. Not YIKES yet, but still, ouch.

(I say "increase" instead of "reduction in impact on principal" because I tend to bump my payments to keep me on track)

And my mortgage is not a particularly LARGE one by Canadian standards. Some people must be already hurting quite a bit.

I got a 5-year fixed in 2020, but had I taken a variable rate my mortgage would have been up by $400/month.. and would be about to bump another $200 a month assuming the BoC does another 0.75% increase in a few weeks.

I'm planning on switching to variable when I need to renew to try and blunt some of the higher rate impacts when I renew in 2025.. but hopefully we are past the interest rate peak then haha. I have a very.. large budget buffer where I can adjust spending if I need to. I won't be happy about a 4% interest rate if it happens, but I could handle it relatively comfortably.

[MolsonExport]

Housing prices have gone swiftly into reverse here in London, and inventory on the market is suddenly at the highest level in 10 years. A hard landing.

A wave of buyer's remorse is washing over London's cooling real estate market

Last month, the London St Thomas Association of Realtors said the pace of real estate sales slowed to a level not seen in a decade as a glut of new inventory came onto the market in May.

Slowing sales, fewer bidding wars and more inventory have led an eight per cent price decline in the London region within the last three months after the price of the average home peaked in February at $825,221.

"There is definitely an influx of people who are coming to us looking for some assistance to negotiate their way out of a deal they don't necessarily want to close on," said Stephanie Marentette, a lawyer with Cohen Highley LLP in London, who often handles real estate disputes.

Lower prices financed at higher interest rates do not make things more affordable. Same pain, different label.

[esquire]

Originally Posted by MolsonExport

Housing prices have gone swiftly into reverse here in London, and inventory on the market is suddenly at the highest level in 10 years. A hard landing.

Lower prices financed at higher interest rates do not make things more affordable. Same pain, different label.

Sounds like a lot of people who bought at the peak (basically over the last year or two) are about to find themselves underwater.

[swimmer_spe]

Originally Posted by Me&You

I doubt the Canadian market is large enough to encourage manufacturers to set up shop, mostly to supply the domestic market. Instead, Canadians would be left with $10k TVs...

Very possible. However, with the way the geopolitics are these days, we could see a shift from Asian markets back to NA markets.

Originally Posted by esquire

Sounds like a lot of people who bought at the peak (basically over the last year or two) are about to find themselves underwater.

It depends if they bought at their max. I bought in the last 2 years and, yes, this is a bit of a concern. However, if the interest rates go down enough by the time I need to renew, there is no issue.

[MolsonExport]

The extraordinary increase in house prices and debt means mortgage rates of 7% would be as painful to borrowers today as rates of 17% were decades ago.

https://theconversation.com/the-housing-...-rate-hikes-hurt-more-than-before-184553

(written by Australians for an Australian perspective, but the conclusions hold here in Canada as much, if not more so).

[Nashe]

Originally Posted by MolsonExport

https://theconversation.com/the-housing-...-rate-hikes-hurt-more-than-before-184553

(written by Australians for an Australian perspective, but the conclusions hold here in Canada as much, if not more so).

I don't think it'll get near that high (I hope?) as 7% here would be absolutely catastrophic for many (including the banks).

[Innsertnamehere]

Originally Posted by Vorkuta

I don't think it'll get near that high (I hope?) as 7% here would be absolutely catastrophic for many (including the banks).

5-year fixed mortgages are already at 4%.

I agree though, anything above 5 or 6% for a 5-year fixed is going to start making people sweat - and to be honest, is probably what is needed to pull this country out of spiraling inflation.

The reality is that we need to tighten our collective belts to kill inflation, and that means people's disposable income will drop for a few years to make that happen. We are all in this pickle in the first place because the government decided to give everyone free money for nothing and massively inflated the money supply leading everyone to go on a massive spending spree, driving product prices up.

[Nashe]

Originally Posted by Innsertnamehere

I agree though, anything above 5 or 6% for a 5-year fixed is going to start making people sweat - and to be honest, is probably what is needed to pull this country out of spiraling inflation.

The delta between 4% and 7% on a 25-year, 750k mortgage is about $1,400/month. That's a lot of streaming services to drop and skip the dishes deliveries to skip.

The reality is that we need to tighten our collective belts to kill inflation, and that means people's disposable income will drop for a few years to make that happen.

*nod* I think most people (myself included) are doing just that right now.

We are all in this pickle in the first place because the government decided to give everyone free money for nothing and massively inflated the money supply leading everyone to go on a massive spending spree, driving product prices up.

That may have been a contributing factor, but I can't help but wonder about other things like pent up demand (from COVID) and the "cattle drives" from expensive to cheaper (but vastly overpriced) real estate contributing even moreso. Housing starts here are still through the roof (mostly in multi-unit large buildings) and that has been stressing trade supply for some time. Not helping inflation, I'm sure.

[thewave46]

Originally Posted by esquire

Sounds like a lot of people who bought at the peak (basically over the last year or two) are about to find themselves underwater.

This is where I wonder.

As long as one can make the payments and has no intention of moving, being underwater isn’t the end of the world. Eventually, the mortgage principal declines to a point where one is above water. One holding a house to live in only cares about the value on a few days:

1. The purchase day
2. The sale day

This will deflate the flip market. Buying a house and expecting a six-figure profit for floors and paint just ended.

Those who are stretched to the max, have variable mortgages, and were planning to not stay somewhere very long will be hurting.

The large scale effect of this? We shall see. I am hopeful that the underlying economy is more robust and the froth of housing prices is like the froth of the stock market - largely illusory to the average person who isn’t buying or selling.

[jonny24]

Originally Posted by thewave46

This is where I wonder.

As long as one can make the payments and has no intention of moving, being underwater isn’t the end of the world. Eventually, the mortgage principal declines to a point where one is above water. One holding a house to live in only cares about the value on a few days:

1. The purchase day
2. The sale day

This will deflate the flip market. Buying a house and expecting a six-figure profit for floors and paint just ended.

Those who are stretched to the max, have variable mortgages, and were planning to not stay somewhere very long will be hurting.

The large scale effect of this? We shall see. I am hopeful that the underlying economy is more robust and the froth of housing prices is like the froth of the stock market - largely illusory to the average person who isn’t buying or selling.

You have a good point - for example, every single person who buys a new car is "underwater" for a bit. But it's okay, they aren't looking to get rid of the new car they just bought.

[kwoldtimer]

Originally Posted by thewave46

This is where I wonder.

As long as one can make the payments and has no intention of moving, being underwater isn’t the end of the world. Eventually, the mortgage principal declines to a point where one is above water. One holding a house to live in only cares about the value on a few days:

1. The purchase day
2. The sale day

This will deflate the flip market. Buying a house and expecting a six-figure profit for floors and paint just ended.

Those who are stretched to the max, have variable mortgages, and were planning to not stay somewhere very long will be hurting.

The large scale effect of this? We shall see. I am hopeful that the underlying economy is more robust and the froth of housing prices is like the froth of the stock market - largely illusory to the average person who isn’t buying or selling.

Depending on how much house prices drop, one could add:

3. Mortgage renewal day - if your house is now worth less than the outstanding mortgage, you may have a problem.

[jonny24]

Originally Posted by kwoldtimer

Depending on how much house prices drop, one could add:

3. Mortgage renewal day - if your house is now worth less than the outstanding mortgage, you may have a problem.

I've been thinking about that, and I wonder, how hard is it to extend / refinance back out to a 25 year amortization period?

Playing with some numbers:

$1million purchase, $800k mortgage, say 2.5% interest, purchased one year ago.

Payment is $3583 monthly. At the end of 5 years, $122,900 has been paid off leaving $677,100.

Of course, higher interest rates pushing house prices down mean it's probably not worth a million anymore, but lets assume the bank is okay with an 80% loan-to-value ratio.

677.10 / 0.8 = $846,375.

So the house is still valued at ~850k instead of a million, the bank should be happy to give you a 25 mortgage on it. That's a 15% reduction in value from the $1mil purchase price, so I guess it could be pretty easy for prices to fall down into that zone.

Let's say the bank goes ahead and gives that mortgage, and rates are now 5.5%:

The monthly payment would be $4133. A jump of $550 a month... still not the easiest thing to swallow.

If you can't reextend, and simply renew for 20 years:

The monthly payment would be $4634. A jump of another $500 a month, or $1050 from your first term.

Ouch.... not a pretty picture.

[LightingGuy]

Our housing supply is too low for prices to crash back to 5x income levels any time soon. We are currently seeing a record number of housing being constructed, but not nearly enough. Greenbelt/Places to Grow Act doesn't help. Neither does our extremely restrictive zoning bylaws and permit processes. If interest rates remain high (which I doubt happens), we might see a crash. But I think right now is just a correction which will last 2-3 years. As soon the government admits we're in a recession the money printers will go back online and rates will drop again. My guess is that happens Q1 2023.

[esquire]

Originally Posted by thewave46

This is where I wonder.

As long as one can make the payments and has no intention of moving, being underwater isn’t the end of the world. Eventually, the mortgage principal declines to a point where one is above water. One holding a house to live in only cares about the value on a few days:

1. The purchase day
2. The sale day

This will deflate the flip market. Buying a house and expecting a six-figure profit for floors and paint just ended.

Those who are stretched to the max, have variable mortgages, and were planning to not stay somewhere very long will be hurting.

The large scale effect of this? We shall see. I am hopeful that the underlying economy is more robust and the froth of housing prices is like the froth of the stock market - largely illusory to the average person who isn’t buying or selling.

I take your point. You always have the option of waiting out the market. But that is not always going to be ideal.

I remember meeting a young newlywed couple from south Florida in 2009. They had bought a condo a couple of years earlier, just before the American housing crash and they were underwater. It was fine in the sense that they weren't looking to sell immediately and they could handle it, but it did restrict their ability to move, whether into a SFH once they had more than one child and needed some more space, or to move to another city to pursue work as Americans often tend to do.

I guess if you're 40+ and have a stable job and already in the "forever home" with room enough for the entire family, being underwater is not necessarily a huge deal. But it could be a real problem for younger people or anyone who can't/won't stay put for the long term.

[lio45]

Originally Posted by kwoldtimer

Depending on how much house prices drop, one could add:

3. Mortgage renewal day - if your house is now worth less than the outstanding mortgage, you may have a problem.

And one could also add:

4. Refinancing Day - the day you show up at the bank intending to use the equity you have in your house.

[lio45]

Originally Posted by esquire

I remember meeting a young newlywed couple from south Florida in 2009. They had bought a condo a couple of years earlier, just before the American housing crash and they were underwater. It was fine in the sense that they weren't looking to sell immediately and they could handle it, but it did restrict their ability to move, whether into a SFH once they had more than one child and needed some more space, or to move to another city to pursue work as Americans often tend to do.

I have FL friends who have been in that situation for about a decade; a couple years ago prices finally went back to above the 2006 Sunbelt Bubble peak, and now they're significantly higher than that.

In retrospect, buying in 2004 wasn't that bad, provided you still have it in 2022.

[esquire]

Originally Posted by lio45

I have FL friends who have been in that situation for about a decade; a couple years ago prices finally went back to above the 2006 Sunbelt Bubble peak, and now they're significantly higher than that.

In retrospect, buying in 2004 wasn't that bad, provided you still have it in 2022.

I guess theoretically you or your heirs can wait out just about any real estate dip, as long as you don't need a larger home for any reason (the 1 bedroom condo is fine for a couple, gets awkward if you want to have kids) or need to move for work/family/lifestyle reasons. The trouble is that not everyone can wait it out, especially younger people in starter residences (condos or very small homes).

[WarrenC12]

Originally Posted by Innsertnamehere

The reality is that we need to tighten our collective belts to kill inflation, and that means people's disposable income will drop for a few years to make that happen. We are all in this pickle in the first place because the government decided to give everyone free money for nothing and massively inflated the money supply leading everyone to go on a massive spending spree, driving product prices up.

Do you have a source for this? Everything I've read from economists say this had a minimal impact on inflation. It's mostly due to a lack of supply. Several supply shocks since spring 2020 have caused issues all over the economy.

It's supply and demand for sure, but not due to "free money", unless you are referring to low interest rates.

[WarrenC12]

Originally Posted by thewave46

This is where I wonder.

As long as one can make the payments and has no intention of moving, being underwater isn’t the end of the world. Eventually, the mortgage principal declines to a point where one is above water. One holding a house to live in only cares about the value on a few days:

1. The purchase day
2. The sale day

Mortgage renewal day 1.5 is another big one. People could easily be underwater in 3-5 years, as principle is paid down very slowly in the first years.