Bloomberg published an article doing the basic math on how much house you could buy in the United States based on a $2,500 monthly payment and a 30-year fixed rate tax deductible mortgage. The price you could afford to pay on that budget has dropped by almost 40% from $758,000 to $476,000. Canada doesn’t have mortgage tax deductibility nor long term fixed rate mortgages, so the pressure on prices is likely to be greater in Canada.
About 23% of Canadian homes are financed with variable rate or fixed-variable rate mortgages and Canadian mortgages are typically for a 5-year term with a handful having 10-year terms. That means in any given year about 20% of mortgages must be refinanced and another 23% will be subject to rising rates as the mortgagor applies the higher variable rates now emerging.
With almost half the market going to feel some pressure, younger buyers who stretched their budgets to buy a condominium in the Greater Toronto or Greater Vancouver areas are going to be hit hard and there will be a lot of homes on the market and more than a few homeowners will lose their homes.
In 2021, arguably the peak of the housing boom, more than half of new buyers chose variable rate mortgages to avoid the higher rates being charged on fixed rate loans. That is going to bite back hard this year. While the majority of Canadians with mortgages say they could absorb a 10% increase in monthly payments, 6% are already struggling and another 23% say they could not afford a 10% rise.
Lenders were offering rates as low as 2.25% last year. Now banks want over 5% on new mortgages, like these TD Bank published rates.
The average Toronto condominium price is about $660,000 today after 20 years of steady increases but now declining with sale prices “above asking” gone and discounts from asking now the norm. A buyer with 20% down payment and a mortgage of $530,000 now faces monthly payments of about $3,500 versus about $2,300 for the same property just last year. Many first time buyers simply can’t and their condominiums will be offered for sale.
Inflation is not going away any time soon, and interest rates are destined to keep rising, making the situation untenable for many. In my opinion, we will see a collapse of at least 30% to 40% in home prices over the next two to three years.
Why is this happening? The anwer lies in Trudeau government policies comprising massive spending financed with bonds sold to the central bank, effectively “printing money” and climate policies that contributed to the global shortage of fossil fuels currently punishing United Kingdom and Europe and eventually coming to North America as progressive governments keep ranting on about the NetZero nonsense, blocking pipelines and stifling oil & gas development. Bookmark this article - by next summer oil & gas prices will be higher; interest rates will be much higher; and, inflation will be higher, possibly a lot higher. Trudeau would like to blame Putin and the Ukraine war for the energy shortage but it is home grown. United States and Canada could ramp up production and solve the global shortage in short order but not with climate nutters in charge.
The painful solution to the inflation is a deep recession which will see many lose their homes, but the likely recession will not see any growth in the world supply of oil & gas under these governments and the eventual recovery will see a repeat of the cycle as fossil fuels shortages compel even higher energy prices and another round of failed policies by Liberal governments will emerge making the economic situation worse, not better. Institutional stupidity has a price and we are the ones who will pay it, our punishment for electing a failed drama teacher surrounded by climate activists devoid of any understanding of the laws of physics and the Americans for electing a career politician who is barely lucid and lacks much cognitive ability.
Our best bet is to throw these clowns out of office at the first chance, endure the punishing interim while a new conservative government takes steps to expand oil & gas output to ease the energy contribution to inflation, and cuts excess government spending by dismantling massive bureaucracies that bring costs without benefit. Trudeau added over 300,000 to federal payrolls during pandemic alone and while the pandemic is over this crowd still collects their salaries and builds indexed pensions while the rest of us struggle to keep the lights on, keep our vehicles on the road and put food on the table.
Time to make changes is now.
Excellent article that speaks the truth about housing prices in the months and years to come.
A very strong concise report!