What are the signs this country has a housing problem, especially in Ontario and Vancouver? There has never been a time when housing has been so unaffordable as today.
Buying a home in this country has never been more difficult, according to economist Robert Hogue in a recent report from RBC.
After a hot two-year run, home prices across the country have softened in recent months, but Hogue highlights how rising interest rates have pushed home ownership costs to record levels. Since March, the Bank of Canada has steadily increased its interest rates, which added hundreds of dollars to mortgage payments. Besides this, Hogue asserts the property value increase during the pandemic has made it harder than ever to become a homeowner in Canada.
Hogue notes that RBC's national aggregate affordability measure - which represents loss of affordability - reached 60% in the second quarter, surpassing the previous worst-ever point (57%) in 1990. In Vancouver, the figure reached 90.2% and in Toronto; it reached 83%.
Hogue acknowledges that buyers in Ontario and British Columbia (BC) remain extremely challenged, but that conditions are still “manageable” in the Prairies and most of Atlantic Canada and Quebec.
Even in the priciest provinces, there is some good news for buyers. We've seen home price declines since early spring that will eventually provide relief to buyers, according to Hogue. "Some of the spectacular price gains made during the pandemic are being rolled back by the sharp housing market correction that began this spring. RBC expects benchmark prices to fall 14% nationwide by next spring — more so in Ontario and BC. As a result, ownership costs should be lower next year. Nevertheless, rate hikes might prevent potential homebuyers from entering the market, since they continue to rise in an effort to "fight inflation."
Almost half of Canadians are also putting off buying a home. Brokers and real estate agents have predicted that prices will drop another 2.2% over the fall, according to Re/Max's Fall Housing Market Outlook Report.
Furthermore, since the Bank of Canada raised interest rates in March, the cost of borrowing has steadily increased, making homeownership unaffordable for many. Even during the boom, home ownership was touted as a better option than renting because larger mortgages still meant lower monthly payments. In many cases, mortgage payments are more expensive than rent due to rising interest rates, and property prices are steadily declining, making homeownership increasingly unattractive. Overnight lending rates have increased 300 basis points since March, and today the Prime Rate is 5.45%, meaning most mortgages are also being "Stress Tested" at approximately 7% or so. In August, the Canadian Real Estate Association reported that total home prices fell 3.9%, which meant an average adjustment of $180,000.
Homebuyers presently waiting on the sidelines, even those who want to sell and buy, are likely to do so in 2023 if market conditions improve, according to Re/Max.
There is no universal application of this to Canada as a whole. When the market begins to correct itself, Ontario and Vancouver, for example, will see the most losses since these provinces saw the most gains during the pandemic. Toronto, for example, has seen a 6.3% price decline and sales are down 35%. Oakville, Ontario, on the other hand, is predicted to increase by 2% over fall. In Muskoka, prices are also expected to rise by 5%.
According to RE/MAX brokers in regions such as Vancouver, BC, Victoria, BC, Kelowna, BC, and Edmonton, AB, rising interest rates impacted local market activity. Consumer confidence weakened, there were fewer multiple offers from buyers, and conditions between buyers and sellers shifted toward more balance, according to the report, which forecasts price declines between 0 and 6.5%, and -3% in Metro Vancouver as unit sales declined by 15%.
In Calgary and Edmonton, demand continues to be strong, although prices are expected to rise by 3% and 1.5%, respectively. Cowtown sales are expected to increase by 25% this fall, according to RE/MAX.
Rising interest rates in Canada's maritime provinces, combined with the possibility of an impending recession, have dissuaded would-be home buyers.
In Charlottetown, PEI, sales dropped by almost half on a month-over-month basis because of rising rates, according to RE/MAX.
As a result of its relative affordability, Atlantic Canada continues to be a popular destination for out-of-province buyers, including Halifax, NS (+1.5%), Moncton, NB (+6%) and St. John's, NL (+7%). Charlottetown, PEI, is the outlier, where the average residential sale prices are expected to drop by 2% in the fall.
Nearly all of Canada's Big-6 banks have increased their short-term fixed mortgage rates over the past week.
Rate increases have largely been limited to 1-, 2-, and 3-year fixed mortgage products, including special offers and posted rates. The increases ranged from 10 to 55 basis points at TD, Scotiabank, RBC, BMO and National Bank of Canada.
However, big banks haven't been the only ones raising rates.
MortgageLogic.news reports that uninsured 1- and 2-year fixed rates have increased by 27 basis points and 22 basis points, respectively, since the beginning of the month. During the same period, average uninsured 5-year fixed rates increased by 5 basis points.
How does yield curve inversion occur? In the bond market, yield curve inversion occurs when short-term interest rates rise above longer-term rates. Typically, this indicates growing pessimism about near-term economic prospects, since more money is moving into longer-term bonds.
So, what is the reason for this?
Investor sentiment has been volatile in the near-term.
Because of the declining GDP, rising unemployment, and net job loss in August, economic data have been trending downward. Yield curve inversion is controversial; however, the time the curve has been inverted and its sheer magnitude shows a recession is looming.
The Office of the Superintendent of Financial Institutions recently changed the Insurer Capital Adequacy Test.
OSFI is Canada’s federal banking regulator and recently, it changed the Insurer Capital Adequacy Test for insured variable rate mortgages. Canadian mortgage default insurers must calculate their capital reserve requirements for residential variable rate mortgages based on an amortization of no more than 40 years.
As interest rates have been rising, especially adjustable rates on variable rate mortgages, longer amortization periods are being implemented beyond the current maximum of 30 years. The amortization period may extend beyond 40 years until the payment is reset to match the original amortization period.
Home Ownership is on the decline, according to Statistics Canada
According to Census data released last week, Canada's homeownership rate is declining. Household ownership (both outright and with a mortgage) fell from 69% in 2011 to 66.5% in 2021. As of 2021, approximately 10 million households owned their own homes. In contrast, renter households grew 21.5% between 2011 and 2021, more than twice as fast as owner households.
Canadian immigration is growing at an unprecedented pace, with its fastest growth since 1957.
As of July 1, the population of Canada stood at 38.9 million. In other words, 284, 982 people have been added since April 1. In terms of highest quality growth, it's the highest since 1949, when Newfoundland was a Confederation.
The provinces of Ontario, Manitoba, and Saskatchewan suffered the highest losses in interprovincial migration, while New Brunswick gained the most.
In order to improve transparency, the Bank of Canada will now publish its summary of deliberations from its policy meetings. The IMF, which stands for International Monetary Fund, provided high marks in its report, it noted that the Bank of Canada does not publish the minutes (which is a summary) of monetary policy deliberations, which is a practice considered the “gold standard” among inflation targeting central banks.
The IMF also agrees that the Bank of Canada should improve communication regarding ex-post evaluations of policy decisions along with improving the timeliness and accessibility of published macroeconomic projections.
In the coming months, the Canadian Mortgage and Housing Corporation predicts home prices will fall as much as 15% across the country.
The Canadian Mortgage and Housing Corporation (CMHC) released a comprehensive report in May that revealed new housing starts haven't kept up with population growth in some of Canada's largest cities, especially Toronto, making affordability a "noteworthy" problem.
According to the housing authority the following month, the planned construction of new units by 2030 will not be enough to address Canada's supply and affordability issues, concluding that an additional 3.5 million units will be required.
According to the CMHC report released in June, the housing stock will rise by 2.3 million units by 2030, reaching close to 19 million units. In order to make Canada affordable for all, that number would have to rise to over 22 million, according to the report.
For those re-qualifying for a mortgage at the current rate plus two percentage points, the Toronto Regional Real Estate Board has called for a more flexible stress test. So far, OFSI has rejected the idea of removing or making amendments to the mortgage stress test.
Rob McLister, founder of Ratespy.com says that CMHC is actually hinting at tightening mortgage policies, which will make financing even more difficult. As I mentioned earlier, CMHC is actually predicting a market correction of 15-18% nationally. According to Evan Siddall, the former CEO of CMHC, the Canadian economy could be very hard hit, especially with so much debt.
In order to understand the potential risks ahead, the right policy measures must be taken and young people must be warned that they could face negative equity, which is when you owe more on your mortgage than your property is worth. Buying a home with a mortgage is especially risky less than 20 percent down, since it doesn’t take much correction in the market to tip this class of buyers into the “negative equity” territory.
As predicted by not only CMHC, but also big banks like RBC and BMO, buyers with 5-10% down could very well lose that downpayment through the depreciation of real estate by 15-30% in the next coming months. Why is negative equity important?
If the recession becomes worse, it won't be possible to sell your house if you lose your job, since if you purchased with a high-ratio insured mortgages you might owe more than your house is worth, which would mean you would have to come up with the difference to sell. When we sell our real estate, we usually have left over profits, so this is definitely not something we're used to.
It is difficult for people to move or refinance if they are underwater. CMHC will likely create policies to protect against this in the future. First-time buyers may need a larger down payment or a more rigorous stress test. In the coming weeks and months, I will be watching for and reporting on any policy changes proposed or implemented.
Banks are also looking at their risks and whether they need to change their policies to protect against default or homeowners entering negative equity territory.
Banks, governments, and central banks are all taking action that is causing a tremendous "rethink" about homeownership. Does real estate still outperform renting in a declining asset environment? One thing is certain: the central bank can control property values through its monetary policies. In the wake of a 10%-20% decline in real estate since March, people are now taking more time to decide whether they should buy now or wait 3-6 months.
There will be a 2-year lag effect on the housing market in a recession. There is a possibility that many people may not be able to get jobs back, including those who would like to buy a house or already own one. Unknowns abound. The housing market has just begun to feel more pain, according to Rob McLister.
The Bank of England has now pivoted back to money-printing or Quantitative Easing.
To protect the macroeconomic situation in the UK, the Financial Institution of England is pivoting to quantitative easing. In order to restore economic stability within the UK, the Financial Institution of England will buy long-term government bonds.
The Sterling Pound fell to its lowest stage against the US greenback after the new UK Prime Minister revealed plans to reduce taxes. Tax cuts financed by debt were announced by the UK's new chancellor.
Essentially, the UK is in the midst of a full blown financial disaster as inflation continues to soar. Moreover, the fear of a recession (which we are likely already in) has adversely affected the UK's macroeconomic situation. Accordingly, the Bank of England will pivot to Quantitative Easing in order to restore some stability to the economy.
Is the US Federal Reserve also poised to pivot? Everyone is asking this question.
As of now, the Federal Reserve maintains a hawkish stance on inflation. According to Neel Kashkari of the Minnesota Fed, interest rates may not be excessive enough. Furthermore, Susan Collins of the Boston Fed emphasizes the importance of maintaining hawkish policies.
The CEO of Eight World, Michael van de Poppe, reveals that the Fed may have to pivot eventually. As the demand slowdown accelerates, recession fears are growing.
Central banks face an acute dilemma they haven’t faced for a long time as the global economy teeters and markets are in turmoil. The recent crash of the British pound and bond markets is the latest example. The choice is between maintaining price stability – tightening monetary policy to avoid inflation spiraling out of control – and financial stability – preventing financial markets from seizing up.
According to the Federal Reserve, it plans to keep hiking interest rates until inflation returns closer to the bank’s target of 2 to 3 percent.
The result might be the kind of serious, panic-level troubles reminiscent of the global financial crisis and the COVID-19 pandemic.
There is no doubt that American markets are under stress at the moment. Over the past year, Bitcoin (BTC) and ether (ETH) are down more than 50%, the Nasdaq 100 has fallen 30%, and the S&P 500 is down 22%.
As a place to hide during asset crashes, the bond market – as represented by the "risk-free" 20-year bond – underperformed the S&P, losing 30% in 2022.
Since the Fed was founded in the early 20th century with the aim of reducing the threat of bank runs, the Fed has always made it a priority to help financial markets. Although implicit throughout the bank's history, the Fed's price stability mandate wasn't explicitly enshrined in law until 1977.
Is the Fed likely to prioritize inflation over market stability this time around?
According to Dick Bove, chief financial strategist at Odeon Capital, whenever the United States economy or financial system faces difficulties, the Fed can print money to fix the problem. However, we've learned that we can't continue doing what we've done.""Wall Street isn't going to give up the American economy just to please Wall Street," he said.To stop the shocking rise in rates over the past few weeks, the Bank of England announced on Wednesday its intention to buy as many long-dated gilts as necessary to restore stability to its bond and currency markets.Although U.S. bond yields have not fallen as dramatically as those in the U.K., the 10-year Treasury yield briefly reached 4% on Wednesday, a record high.U.S. markets could get a lot worse if Fed Chair Jerome Powell and his colleagues fail to bring current inflation rates of 8.3% back to near their 2% target.
Does the Fed need to pivot like the Bank of England and buy bonds outright again?
According to Bove, the U.S. is at a point where the old playbook - the Fed aggressively easing policy to cover up a crisis - won't work anymore. According to him, inflation will take off "like a rocket" if the Fed prints money.In order to achieve long-term stability, the Fed seems willing to put markets through some short-term pain, according to Beth Ann Bovino, chief U.S. economist at S&P Global.During these times, it's hard to know what the Fed is thinking, but my impression is they don't want a global financial crisis.Due to shaky markets and the recent dot plot showing continued rate hikes into 2023, Fed officials keep reiterating they won't pivot to easier policy. According to the fed funds futures market, no rate hikes or rate cuts are priced in for all of 2023.As Bovino put it, "it could be that they're talking the talk." The Fed is trying to establish credibility by giving markets forward guidance about what it plans to do.
It's just not possible for them to keep increasing debt, according to Bove. The United States cannot pay back its debt at some point when the debt becomes so enormous that it cannot be repaid.
Alberta is calling…
Residents of Ontario are fleeing by the tens of thousands because of the astronomical cost of living. Data from Statistics Canada (Stat Can) shows a surge in interprovincial migration in Q2 2022. The talent in Ontario is fleeing to more affordable regions such as Alberta and Nova Scotia. Immigration is having a hard time filling the gap, according to a Big Six bank. As a result of Ontario's failure to compete for young adults, this level of migration has never been seen in the province before.
There is a sudden rush to move among Ontario residents. In Q2 2022, over 49,000 people left the province for another province. Outflows were up 77.6% from the previous quarter and 45.9% from last year's same quarter. In a single quarter, Ontario has never seen so many people rush for the door.
The trend has reached an emergency level. A total of 125,000 residents left in Ontario, up 54.7% from a year ago. A lack of perceived opportunity is reflected in strong performance and rising outflows. Housing is expensive in one of North America's worst-paying tech hubs, so it made sense.
The negative numbers indicate that more people are leaving than arriving in a province. For a temporary fix, immigration can be used, but this is a long-term problem. As with locals, immigrants eventually see a lack of opportunity and move as well.
It has never been this problematic for Ontario's net interprovincial flows. There were 21,000 net outflows in Q2 2022, a record since the early 1980s recession. There were over 47,200 outflows for the quarter. In the 12-month period, 47,200 more people left than arrived in other provinces. The situation in Ontario has never been this bad, and it's getting uglier.
According to BMO Capital Markets, the seasonally adjusted annualized net migration looks terrible.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929