Juggling Dynamite

It is wildly unpopular to say this, but Canadian home prices need to move much lower. And yes, I, too, stand to lose net worth as they do.

Immigration is unlikely to prevent mean reversion here. Immigrants need places to live, to be sure, but historically, it took an average of 7 years before immigrants were able to buy a home in Canada. And that was when prices were more affordable than today.

At the moment, home affordability is at its worst since mortgage rates were north of 18% in 1981. The driver of unaffordability today is not interest rates (historically average); today, unaffordability is driven by prices being impossible multiples of household income (i.e., 5 to 12 times the average household income versus long-term norms of 2 to 4x).

Where I live, one hour north of Toronto, new listings are up about 66% since the end of February. Properties are sitting on the market, and would-be sellers are still asking prices paid when mortgage rates were under two percent compared to the 5% range today.

Recently, “reduced” and “new price” listings have been popping up. This lovely custom home on my walking circuit in a premium area across from the lake was built on spec during the pandemic. So far, as shown below, the price has been reduced by 22% to $1.69m from $2.195m two years ago.

A vacant lot around the corner has been marked down 58% to an ask of $495K from $1.195m three years ago (see listing history here). This lovely home in the same neighbourhood sold for $1.8m in February 2022 and is now listed 17% lower at $1.49m after months on the market (see price history here).

The trouble is that even at the $1.49m asking price, with a 20% (299k) downpayment, the mortgage payment would be $7,387 a month, $8,195 a month, including property taxes. That requires $98,340 a year in after-tax income to cover the mortgage and property taxes (as shown below), let alone all life’s other expenses.
Less than 10% of Canadian households earn more than $100k a year before tax, never mind after (see Is a $100k salary enough for a comfortable life anymore?).

The reality is that most homeowners today would be hard-pressed to qualify for a conventional mortgage at current asking prices and interest rates to buy their current homes.

Yes, the Bank of Canada has started easing base rates in the banking system and is likely to respond to a weak economy and rising unemployment with more cuts in the months ahead. But that’s not all that’s needed here.

The lure of easy money delivers time-worn outcomes, once again. See how Real estate investors are wiped out in bets fuelled by Wall Street loans:

Lynn Nathe was growing tired of the meager gains from her family’s retirement account. In late 2021, she invested $200,000 with a company that was making 30% returns by buying the hottest ticket in global real estate: US apartments.

Now, she says, most of that money is gone.

For Nathe, a business school graduate who invested earnings from her husband’s dentistry practice in Yakima, Washington, the loss is a personal calamity. Yet the story of her ill-timed bet — and the collision of social-media fueled investing, Wall Street’s securitization machine and sharply higher interest rates — also shows how FOMO and easy money once again combined to burst an American real estate bubble.

Hmmm…you don’t say:

“When you’re at a casino, you know what you’re doing is gambling,” said Aleksey Chernobelskiy, whose firm, Centrio Capital Partners, runs a service helping retail investors salvage their investments in multifamily deals. “Here, people were gambling but they didn’t know it.”

About that Canadian debt renewal cliff…

Canada’s Big Six banks are adding billions of dollars to their emergency funds as mortgage renewals approach for more than three quarters of homeowners. Andrew Chang explains why the banks are preparing for more delinquencies, and who’s most at risk. Here is a direct video link.