Jamie Burke

Jamie (she/her) is a Writer with Real Estate Magazine, as well as Partner of a marketing agency, Burke By Burke, with her husband Eddie. She is an avid reader, self-proclaimed foodie, urban land economics enthusiast, Barry’s Tea drinker and part-time yogi. She lives, works and plays in Port Moody, BC, on the ancestral and unceded homelands of the kʷikʷəƛ̓əm (Kwikwetlem), səlilwətaɬ (Tsleil-Waututh), xʷməθkʷəy̓əm (Musqueam), Sḵwx̱wú7mesh (Squamish), q̓ic̓əy̓ (Katzie), qʼʷa:n̓ ƛʼən̓ (Kwantlen), qiqéyt (Qayqayt), and Stó:lō (Sto:lo) Peoples

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Emma Caplan-Fisher

Emma Caplan-Fisher is an editor and writer for REM. She has over a decade of experience in various content types and topics, including real estate, housing, business, tech, and home & design. Emma’s work has also been featured in Cottage Life, the Vancouver Real Estate Podcast, the Chicago Tribune, Narcity Media, Healthline, and others. She holds a Certificate in Editing from Simon Fraser University.

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There are buyers, so many that bids may be as high as tens of thousands of dollars above the usual price; there are sellers, with new listings surging of late; and the price levels seem to indicate that people have money in their hands to buy a house either as an abode or as yet-another investment asset.

But talks about a housing bubble have also had headlines. A correction, or even worse, a large-scale crash, may have been looming for a while, some analysts suggest.

These discussions may not be giving a complete picture for there is one more stakeholder that usually does not feature in discussions on the housing market – a buyer who has recently purchased a house and exited the market.

This stakeholder may have a key role in shaping the market in the near-to-medium term. How? This buyer bought the house to occupy it, or as a flipper to sell it at an appreciated price.

In both cases, what happens once the sale has been executed may go a long way toward shaping sentiments. Now that the Bank of Canada has addressed the threat of record-high inflation and is raising interest rates to control it, things are probably set to change for homebuyers.

Reports suggest people are flocking to mortgage agents to seek advice on how rate hikes would impact their home loan repayments. According to estimates, mortgage loans have a substantial share in the total household debt in Canada, close to some 69 per cent. This share, experts say, has increased in the post-pandemic phase. What may worry the most is the high debt-to-disposable income ratio, which suggests that Canadian households have an average of $1.77 debt against a dollar of disposable income.

While the rate hikes could initially impact borrowers with variable interest rates more than those who have a fixed-rate loan, things may become complex in the coming days.

Separately, in the event of a buyer having bought a house as an investment asset, the impact of a rate hike could be two-fold. On the one hand, mortgage loans becoming costlier may ultimately lead to a correction in the market, which may prevent house prices from appreciating in the same fashion as they have over the past 18 months.

Windfall capital gains, by this measure, may not accrue. On the other hand, if that buyer has also availed a loan to fund the asset, mortgage dues are likely set to become costlier.

Regardless of how the housing market shapes up in the near term, concerns over higher mortgage payments are here to stay.

In this light, what is the road ahead for an indebted household? Income may not be raised overnight to offset steeper debt repayments.

Some experts are concerned many households may end up living paycheque to paycheque, struggling with finances. It means Canadians must become a little more cautious when selecting an investment asset.

Fixed income options like term deposits are usually safe, but they may not provide an adequate hedge against rising inflation. What then? First, let’s look at the option that is riskiest, though gaining popularity.

Crypto assets including Bitcoin and Dogecoin have gained traction over the past few years, thanks, perhaps, to a steady rise in the number of entities providing crypto trading services. But cryptos have always had an unpredictable ride, with only those investors that buy and sell the asset at the most opportune time likely able to make gains. This year so far, these assets have largely remained subdued, with large cap cryptos like Ether and Shiba Inu trading in the red on a year-to-date basis.

The global stock market has not performed great this year, but this option is less risky. On a YTD basis, the S&P/TSX Composite Index, the benchmark index of the Toronto Stock Exchange (TSX), is trading in the green.

Last year, this index topped 20,000 points, a milestone that may have been deemed too formidable at a time when the economy was reeling from the pandemic-induced slowdown. Global stocks like Apple and Microsoft, which gave returns in 2021, are also an option available to investors based in Canada.

As stated earlier, stocks trading on any exchange are a risky asset, but they may provide an opportunity to those homebuyers in Canada who may see an uptick in their debt due to rising benchmark rates.

Away from all the talk about sky-high home prices and a looming correction or crash are those buyers that have purchased a house in the hot market. Now is when some of these buyers might experience the troubles that come when debt becomes burdensome.

Data suggests total household debt in the country is as high as $2.5 trillion, and new mortgage debt of over $190 billion has been added during the post-pandemic phase. Separately, analysts are concerned that high household debt might elevate macro-economic troubles, which may be the primary reason the bank wants to dissuade borrowing by raising rates.

That said, the housing market does not seem to be in any major trouble as of now. New listings are here for prospective buyers to bid on.

The market may defy the odds of higher mortgage rates if Canada manages higher economic growth, combined with job growth and wage rise. As far as investing in the wake of high inflation and likely rising mortgage payments is concerned, Canadians must be more careful than before. Knowing what benefits and risks any investment option brings is key to a prudent investment strategy.

Kunal Sawhney

Kunal Sawhney is the founder and CEO of Kalkine. An accomplished financial professional, he has extensive expertise in equity markets and adopts quantitative and qualitative stock selection practices.

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In the midst of a pandemic that has ravaged not only the Canadian economy but every developed and emerging market, the domestic housing sector seems to be swimming against the tide. It is creating wealth for sellers even as other sectors of the economy grapple, leading to a high unemployment rate of 8.2 per cent.

Behind this housing market growth, sometimes termed hyperinflation, is easy and cheap debt available to Canadians. For over a year now, the central bank has kept policy interest rates at a record low and despite inflationary pressures, any immediate hike is out of sight.

Another critical factor is the high household savings owing to wage subsidy and other allowances doled out by the federal government. This pandemic stimulus was, however, never intended to fire up the housing market. It was meant to boost demand across sectors because subdued demand can push the economy into depression, besides dealing a body blow to job creation.

According to Equifax, a multinational credit reporting agency, the credit card debt of Canadians is at a six-year low. However, mortgage debt is rising fast, accounting for a large chunk of total household debt. British Columbia and Ontario, which have the hottest housing markets, have seen the biggest hike in consumer debt, as per the agency.

The situation is perplexing. Credit card debt, which customarily should have surged given joblessness and inflation, is down and mortgage debt, which essentially translates into a bigger chunk of income going toward repayment, is up.

CREA confirms average house price in Canada surged by 38 per cent year-over-year in May 2021, despite moderating house prices over the past two months. Clearly, people are bidding more to acquire a new house, which has squeezed out groups like new Canadians, youth and single parents. Many of them will be renting spaces acquired at high prices, leading to increased rental payouts that can hurt this group and curb their spending capacity on other goods.

Central bank warns of high mortgage debt

Less than a month ago, the Bank of Canada warned about the damage soaring house prices can cause to the broader economy. Firstly, since mortgage debt is offered at a variable rate, servicing debt can become costly once the central bank decides to hike benchmark rates. Secondly, mortgage debt curtails the spending capacity of households by a significant margin.

Tiff Macklem, governor of the central bank, has categorically termed imbalances in the housing sector as the “biggest domestic vulnerabilities”. Wealth has been parked in housing assets, inadvertently leading to a sizeable drop in household consumption.

The central bank said Canadian households are “loaded with mortgage debt”, a fact now corroborated by the latest Equifax report. The pandemic has yet to subside and the economy is yet to attain pre-pandemic employment and international trade fronts.

The biggest worry is that the twin elements of government subsidy and cheap credit fueling housing sector growth are anything but eternal. Cash support has already shot up the debt-to-GDP ratio, and to reign in fiscal slippages, the government can withdraw such measures anytime. The central bank also has limited elbow room to keep interest rates at near-zero levels in the wake of rising prices. In April, inflation surged by 3.4 per cent, the highest pace in almost a decade. The bank has said that the April price rise will not require “immediate action”; however, a rate hike cannot be ruled out in the medium term.

Marginal cooling down of the searing housing market over the past two months hints at some ongoing correction. If the Bank of Canada’s warning is anything to go by, the decline in household income will be coupled with a fall in housing prices. Any event like a stock market crash or hike in benchmark rates can lead to sharp repricing of mortgage debt exposure, the bank says. Higher debt servicing cost and reduced credit availability can bring down housing prices, something that recent stress tests failed to do.

Money is a limited resource and high inflation can further limit its supply. The cessation of government cash support will put pressure on household income. It can shape Canada’s housing sector in the medium term. Meanwhile, what is more worrying is the existing burden of mortgage debt on Canadian households.

The silver lining is the reopening of the Canadian economy and improved activity after vaccine rollouts.

Kunal Sawhney

Kunal Sawhney is the founder and CEO of Kalkine. An accomplished financial professional, he has extensive expertise in equity markets and adopts quantitative and qualitative stock selection practices.

kalkine.ca/

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The company polled 750 mortgage-seekers between the ages of 25 to 44, many of whom are first-time home buyers.

“We were surprised by how many Canadians would only go to one bank for a mortgage,” says Jesse Abrams, CEO and co-founder of Homewise. “This is an outdated and inefficient way to finance one of the biggest commitments of a home-buyer’s life. By not shopping around, home buyers can lose money on rates, but that’s only part of the story. Mortgage providers offer different features such as penalties if a mortgage is broken before the term is complete, which can be thousands of dollars more depending on the lender. It’s a case of comparing apples and apples before signing on the dotted line, and it can be complicated.”

Homewise offers an online mortgage process that matches borrowers with mortgage options from more than 30 banks and lenders.

Turning to a familiar bank may seem like the easiest solution, which is probably why more than half of Canadians do that, the company says. But there is a lack of transparency in many of the available options, especially if a buyer considers only one lender, it says in a news release.

“It’s about due diligence,” Abrams says. “We’re talking an outlay of hundreds of thousands of dollars, so why go for only one option? We know that consumers obsess about interest rates, when that is only part of the equation. Too many Canadian borrowers, especially first-time home buyers, don’t realize they have other options besides banks, and they are far too often leaving thousands of dollars on the table.”

REM Editorial Team

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“Earlier fears (and some dire economic forecasts) now appear to be much less probable,” says report author Will Dunning. “Available data shows that there is now only a very small minority of mortgages still in deferral (in the area of two per cent) and among borrowers for whom deferral periods have ended a very large majority (just under 100 per cent) are now making the required payments.”

But Dunning says that because of the unpredictability about the course of COVID-19 and the economic consequences, “This leaves us highly uncertain about how many Canadians will have difficulty making their future mortgage payments. Our survey data indicates that a substantial majority of mortgage holders (72 per cent in the fourth wave) expect that as a result of COVID-19 they will have “no difficulty” making their payments and a further 23 per cent expect “some difficulty.” Five per cent expected a higher degree of difficulty.

“We are facing an economic risk, as has been reported by numerous economists and crown agencies, that at the end of mortgage deferrals there could be large numbers of Canadians unable to meet their mortgage obligations, forcing them to sell their homes,” says Paul Taylor, president and CEO of MPC. “This may result in a rapid increase of homes available for sale, which causes prices to fall, which in turn impairs the economy. Fortunately, the number of Canadians expected to need continuing support following the expiry of the deferrals appears to be significantly lower than originally anticipated, which our survey respondents reinforce.”

The fourth installment of Rapidly Evolving Expectations in the Housing Industry surveyed almost 1,000 Canadians, comprising a wide sample of homeowners with mortgages, renters and others, including people who live with their parents.

As with other surveys in this series, a large majority of respondents said they believe homeownership is a good investment. Those who do not currently own a home are hoping they will be able to purchase one.

“I am most struck by the huge rise in aspirations about home ownership, although we don’t know how many of these aspiring homeowners will be able to accomplish their new goals,” says Dunning. “The strength of sales data so far implies that ‘all of this’ has caused a lot of us to give a lot of thought to how we live our lives, and in what arrangements.”

REM Editorial Team

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For first-time buyers looking at variable rate mortgages, the BMO survey says 55 per cent are looking long-term and believe that they will end up paying less over the term of the mortgage. Regionally, buyers in Atlantic Canada, Alberta and Ontario are the most likely to share this sentiment.

“For first-time buyers that are in a comfortable financial position, we are in a favourable interest rate environment,” says Hassan Pirnia, head of personal lending and home financing products at BMO Bank of Montreal. “When looking at the type of mortgage, it’s important to understand how the choice will affect day-to-day finances and long-term financial plans.”

The survey, conducted by Pollara Strategic Insights, found that 56 per cent of first-time homebuyers will rely on family for financial assistance. Millennials are more likely to look for financial assistance than their Gen X counterparts. Among Canadian buyers looking for financial assistance, nearly a quarter are looking for between $10,000 and $50,000. On average, these first-time buyers are looking for more than $44,500 in assistance.

The survey says that of those looking to lean on family for financial help, 11 per cent are expecting more than $100,000.

“We continue to watch the impact that COVID has had on homebuyers but would encourage buyers to be patient and ensure they can sustain the monthly costs,” says Pirnia. “In our conversations, we typically advise prospective buyers not to spend more than 30 per cent of their monthly income on housing. On our side, we always look for opportunities to help with affordability – like providing cash back offers for first-time buyers – or helping to educate buyers about what they can afford.”

Meridian, Ontario’s largest credit union, is offering a hybrid mortgage, which it says can shorten the timeline of buying a home for young adults just starting out.

“Even with a 20-per-cent down payment, purchase options for first-time home buyers can be restricted with conventional mortgages, especially for young professionals and recent graduates who may be starting their careers and already have other financial obligations like student loans,” says David Moore, chief marketing officer and SVP retail banking.

The product consists of two components: a conventional mortgage (interest and principal repayment) and a hybrid loan (interest only repayment). The total amount borrowed can be up to 80 per cent of the purchase price of the home with the larger component structured as the interest-only hybrid loan (60 per cent) and the smaller component as the conventional mortgage (20 per cent).

To be eligible for a hybrid mortgage, borrowers must have access to available resources for a 20-per-cent down payment. The maximum amount on the hybrid loan must equal 60 per cent of the purchase price. The minimum amount on the mortgage product must equal 20 per cent of the purchase price. Other key criteria will also be applied, Meridian says.

The mortgage is designed with the intention that, over time, new homeowners can move from the hybrid to a standard mortgage as their financial capacity deepens.

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Currently the stress test rules keep renters from buying homes in affordable provinces and cities, such as the prairie and Atlantic provinces and in Quebec, says Paul Taylor, CEO and president of Mortgage Professionals Canada. “They (residents) can find properties they can finance quite affordably but they can’t afford the fictitious rate . . . given the distance between the street rate and the stress test. . .”

Reducing the stress test rules could increase buyer activity, but if the federal government thinks a recession is coming – as a number of economists predict – then don’t count on them making significant stress test adjustments, Taylor says.

MPC has wanted a reduction in stress tests almost since the introduction in 2017. Mortgage insurance premiums are high and stress test qualifications are stringent, Taylor says, noting that individuals must also be “very well capitalized” under the minimum capital tests.

If the overnight rate is calculated at three per cent, which the government says is neutral, then the interest rate for most consumers would be 4.25 to 4.5 per cent for a five-year fixed term, he says. An interest rate at neutral or above neutral means the Bank of Canada is trying to suppress, not stimulate, activity, he says. Consumers should not face stress tests on top of a suppressive interest rate, “or we almost will be doubling down specifically on the real estate sector when trying to slow the economy.”

MPC’s recommendation is a floor of a qualifying rate of 4.5 per cent, he says. If the contract rate is lower, people should prove they can manage it; if higher, they should be able to qualify at the contract rate “because they are already paying a higher than usual interest rate . . .”

Taylor says MPC’s calculation for a stress test that is 75 basis points above contract – the equivalent of a two-per-cent interest rate hike after five years – has garnered little attention from the government. That number was arrived at partly through calculations of an increase in property equity over five years and an increase in owner’s earnings.

MPC also advocates exemptions to Guideline B-20 for mortgage renewals. Some borrowers successfully completing a five-year term can’t move their mortgage to a different lender with lower rates because they don’t qualify under the current stress test rules.

The government is aware that any changes to the insured market must be followed in the uninsured market to avoid “a dislocation in the way the market will work,” Taylor says, pointing out the government is expected to collaborate with all parties, including the Office of the Superintendent of Financial Institutions (OSFI), the Bank of Canada and Canada Mortgage and Housing Corp. on any changes to avoid the problem.

Banks have 75 per cent of market

In the CMHC Residential Mortgage Industry Dashboard released last fall, 75 per cent of outstanding mortgages were held by the banks and 0.23 per cent of those mortgages were delinquent. Taylor expects a “small percentage erosion” in the bank mortgages because of regulatory qualifications, while non-bank lenders could pick up that slack.

Credit unions and caisses populaires held 14 per cent of home mortgages, according to the CMHC report, and only had a delinquency rate of 0.16 per cent. While credit unions, (provincially regulated) are not required by law to adhere to the stress test, many boards have voted to voluntarily comply anyway, Taylor says. Meanwhile, credit union boards with laxer underwriting rules will still have to show prudence in managing depositors’ money.

The CMHC report indicates that mortgage finance companies held six per cent of the market, with a delinquency rate of 0.26 per cent rate. Mortgage investment corporations (MICs) and private lenders, meanwhile, held only one per cent of the market, with a delinquency rate of 1.92 per cent. But this sector is increasing at about 10 per cent a year versus only two per cent annual growth from other lender sectors, says Tania Bourassa-Ochoa, senior housing research specialist, CMHC.

Bourassa-Ochoa says most MICs concentrate in large metropolitan areas such as Toronto, Vancouver and Montreal.

While MICs have high interest rates, they are still “probably significantly lower” than rates negotiated with banks for unsecured lines, says Taylor. “They are performing a service that the marketplace really quite desperately needs . . . considering the contraction of credit availability of stress tests and such.”

30-year amortization

MPC advocates the reintroduction of an insurance-eligible 30-year amortization period for first-time buyers. Taylor says it would be more effective than the first-time homebuyers incentive plan in place now, which is a shared equity mortgage funded by the feds, he says.

Taylor notes that precluding people from taking on the debt of home mortgages doesn’t stop them from building other debt loads through credit cards, which have higher interest rates.

Bourassa-Ochoa says uninsured mortgages are growing faster than insured mortgages.

According to Equifax data, which covers about 80 per cent of outstanding mortgages, there are about 8.162 million mortgage holders in Canada, Bourassa-Ochoa says.

Taylor says the MPC agrees with many policy points in federal housing and CMHC strategies. Increasing purpose-built rental in hot markets such as Toronto and Vancouver will take the pressure off condominium markets to address rental demand. Purpose-built rental will also provide more security of tenancy than condominium rentals does.  “It could start to ease (condo) pricing because there is lower investor demand. . .”

The MPC also supports as-of-right zoning around transit hubs such as subway stations to prevent local residents from vetoing increased densification or nodal developments. While at times property owners have legitimate concerns about developments negatively affecting their property values, NIMBYism can have a negative effect on healthy growth in cities like Toronto and Vancouver that need more affordable housing, he says.

Don Procter

Don Procter is a contributing writer for REM.

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Canadians report feeling pressured by stricter mortgage regulations that went into effect in 2018, says the survey. It found that 56 per cent of Canadians see qualifying for a mortgage as a barrier to home ownership, a six-point increase from 2018. This concern rises to 64 per cent for consumers who recently purchased a home.

After mortgage qualification, the next top worry for buyers is whether they can afford the mortgage payment: More than half (54 per cent) report this as a barrier.

Since the stricter mortgage requirements took effect, buyers’ worries are growing according to the survey. Half of Canadians (51 per cent) say they are concerned that stricter rules will prevent them from qualifying for a mortgage, up five points since 2018.

Sixty-nine per cent of those 18-34 years old are concerned about qualifying for a mortgage under the stricter guidelines. This worry is also present for current renters who may be considering the purchase of their first home: 66 per cent expressed concerns about mortgage qualification under stricter guidelines, says Zillow.

The Ipsos poll was conducted between Sept. 24 and Oct. 8, 2019, on behalf of Zillow. For this survey, a sample of 1,503 Canadians aged 18+ was interviewed online.

REM Editorial Team

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