The largest housing PRICE correction in Canada was 27% in the early 1980s (a $100K house selling for $73K). Can it happen again? – July 25, 2022,
When it comes to Canadian Real Estate, I have to remind the Canadian reader that the Canadian taxpayer is on the hook if the housing market crashes. In Canada, we have a Crown Corporation(State-owned enterprise) called the Canada Mortgage and Housing Corporation(CMHC) that sells mortgage-backed securities as well as mortgage insurance.
If the Canadian housing market COLLAPSES, this would put the CMHC underwater and force the Bank of Canada, as well as Justin Trudeau, to bail them out. Now, if the CMHC comes hat and hand for a bailout, I don’t care who the politician is, Conservative or Liberal; the CMHC will get their bailout money. Because most of the mortgages that require mortgage insurance would be far more expensive and far riskier to private lenders without CMHC, which means a higher interest rate for the borrower.
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Now, if the CMHC were to default, there are other avenues that private banks could deploy with the assistance of the government, could be 100 Year amortizations to lower monthly mortgage costs; the private banks could employ other debt deferral concepts; the downside to that is that it could hurt future home SALES.
Because any new rules would have to apply to new homebuyers who would NOT see a reduction in home prices but would see an increase in either mortgage payments or the length of the mortgage, once you understand the dilemma of the Canadian real estate market, you’ll start to understand why the U.S dollar is a safe haven for most investors.
What I’m describing above is not only a Canadian housing market problem, but its common in most developed nations; what makes Canada’s situation unique is our PRIVATE debt to GDP numbers, which shows me how EXPENSIVE the Canadian government is to finance, but the average person might see as Canadian consumer being 100% reliant on the private debt market to survive.
Everyone who studies finance has their own theory on what they expect to happen, but all roads point to the Canadian dollar losing its value and potentially its standing in the world. It’s not that Canada doesn’t have assets; it’s that we’re inflating the prices of our assets, thereby making it harder for businesses to CASHFLOW.
The higher the price for COMMERCIAL real estate, the more expensive it will be to start a business in Canada. It’s even too expensive to start a REAL ESTATE business in Canada; good luck renting out a one-bedroom condo with a $400 maintenance fee that you paid $600,000 for? How long do you want to live in your glorified apartment building? And as the Canadian dollar buys less because of consumer price inflation, all of a sudden, selling a $600K condo for $700 is only a $100,000 profit.
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In Canada, making $100,000 could still equate to poverty. It could cost a person $36,000 just to pay the rent. It’s not abnormal in Canada to spend $3000 per month on rent; that’s only the rent, by the way; I’m sure you want to eat, you might have a car, even if your car is electric, that’s an additional cost, do you want a life outside of your condo? Well, you have to factor in entertainment expenses. Do you want children? Will your spouse be contributing to maintenance costs, because if they’re not, you’ll need a Nanny or a daycare?
Are you following me here? Debt is nothing to play around with; years can go by with you underwater, wasting your life and dragging down the economy. Now historically, governments imagine IMMIGRATION as the cure to a struggling economy, but the problem with Canada’s economy is THE COSTS of doing business. There’s a lot of DEBT servicing priced into the Canadian economy as is, which pushes prices up.
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I bring this up not to merely rant but to explain why a steep housing PRICE correction is UNLIKELY. Until proven otherwise, what’s likely is that the Canadian dollar will be debased. I see NO appetite for austerity measures in Canada. Even when I listen to the Conservative Party of Canada front-runner Pierre Poilievre speak, he appears disinterested in a massively shrinking government, and he sounds like a return to the Stephen Harper days.
Currently, Jean Charest is second, and some say not to count him out, sure, but Jean Charest has BAIL OUT coming out of his pores. Jean Charest won’t even hesitate to grow the size of the Federal government if elected. All of this points to Canadian dollar debasement, and if I’m, to be honest, it’s getting easier for me to see this happening with rampant consumer price inflation ravaging the Canadian economy.
Because consumer prices are mostly going up in 2022 because of Justin Trudeau’s war on fossil fuels, and I expect a decline in oil prices because consumer demands are lowering, this could easily signal Canada’s central bank to halt interest rate hikes, which could quickly lead to shortages. Now, if shortages occur, the politicians will blame the Russia-Ukraine war sure, that’s B.S, but most people won’t know or care, so as inflation creeps higher, it will go relatively unnoticed.
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Now when the article below talks about a historic housing correction, it’s mostly referring to house sales declines, but I don’t know how you measure that if there’s a recession, people might lose their jobs, and if consumer price inflation continues, it will be harder to service a mortgage? What comes to my mind are the real estate investors, who may feel FORCED to sell because a sales slowdown could turn into a market liquidation.
This liquidation might happen REGARDLESS of interest rates; you have to remember that the Canadian housing market has entered pyramid scheme territory, requiring new buyers to buy at a higher price to keep the market afloat. As consumer price inflation eats away at real estate investor margins, they might be forced to put their properties on the market, and if there are no buyers, regardless of interest rates, the sellers will have to start competing with each other and if it’s a condo, is anyone really going to want to pay a premium price for a condo, with rampant consumer price inflation?
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That’s where things get interesting; why the Bank of Canada should raise rates is to wake the FEDERAL government up to the reality that it’s been making HORRIBLE investment decisions, but if you ask me, the Housing market has cut it close ties with the central bank because the CONSUMER price inflation genie is out of the bottle and its first victim will be asset price inflation.
Consumer price inflation is out-of-pocket expenses, and asset price inflation is only good if your asset is CASH FLOW POSITIVE! $600,000 for a one-bedroom condo? Does that would like a cashflow positive asset to you, okay, $600,000 is too high. You’re right $600K+ is more of a Vancouver, Toronto problem; let’s cut that number in half, can you cashflow a $300K condo in a small town with limited job opportunities? And how much rental cashflow can you get from $300K for a one-bedroom condo?
In Peterborough, Ontario, the average cost for a one-bedroom apartment is $1,371, now let’s stick with $300,000 for a condo; I put down 20%, making my mortgage $240,000; according to the mortgage calculator I used, it will cost me $1,470.54 to service this mortgage, and I haven’t added maintenance fees yet?
So for myself, I will be paying close attention to the resilience of the REAL ESTATE INVESTOR! Based on my research, the Canadian real estate market is chalk filled with speculators looking to FLIP their properties for a higher price in the future.
Posthaste: Canada’s housing market headed for ‘historic correction,’ says RBC | financialpost.com
Interesting times ahead!