Now the whole team’s f**king here. Analysts be damned, the Toronto real estate crash isn’t going to happen today, it isn’t going to happen tomorrow, and it likely won’t happen next year – it’s going to happen in four years when the already strained incomes are up for mortgage renewals at higher interest rates. To illustrate just how much of a problem this is, Better Dwelling CEO Stephen Punwasi put together a disaster map so Canadians can understand just how bad it will get. Yes, it’s a disaster – 27.5% of people in Toronto already have difficulty paying their mortgages, and many of these people won’t be able to borrow their way out of this one.
A Crash Is Not Stagnation
Toronto’s real estate is in demand because it’s an economic engine – 20% of Canada’s economy is generated out of this one city. It’s not Scottsdale, it’s not Orange County – people need to move here for work, so the demand is real. This can’t change overnight, but wages have increased 0.38% over the past 30 years and Toronto’s housing prices are up 188%. Mortgage interest rates are also at a historic low, but they won’t always be.
Inventory Floods
Two issues will cause inventory floods, additional strain of high income-mortgage ratios and a hindered ability to borrow.
By StatsCan’s count, there was 361,025 homes in the Toronto region that demonstrate a concerning ratio of income-mortgage payments. This adds to the concern that Canadians are already at an average debt load of 165% – yes, we borrow 65 cents for every dollar we earn. The vast majority of home-buyers we spoke to didn’t quite understand how mortgage prices can go up substantially on renewal. So it was very surprising to them when we explained that a 2% pop on interest rates could add $1,000 dollars to their monthly mortgage. How many Canadians, spending 164% of their income, could take another $1,000 in bills per month? We can think of 361,025 home owners in Toronto that probably can’t. That doesn’t include the people that lied about their income to get a larger loan.
Rising mortgage rates will also impact the number of buyers available for those that need to liquidate their homes. The median family income in Toronto is estimated at $81,452 in 2016. If you have excellent credit (doesn’t everyone?), at a 3% mortgage rate you are typically allowed to borrow $415,840 on a 25 year amort. Adjust that interest rate to 5%, and your maximum borrow is now $337,321 – a $78,519 (~19%) decline of available funds.
There Goes Retirement
Well f**k, everyone’s screwed? Not really, after the US housing crisis one thing was introduced to help curb people from defaulting – 40 year amortizations. They are a cruel joke, but Canada flirted with them briefly in 2008 too, before deciding it wasn’t worth the risk. However, it may be an option that needs to be reintroduced when interest rates go up to prevent defaults.
That sounds like an easy fix, but try crunching some of those numbers. The average first time home buyer in Canada is 36 years old, which would make them 61 years old by the time they pay off that insured, 25-year maximum mortgage. Now they need to take out a 40 year mortgage – putting them at *drumroll* 76 years old by the time it’s paid off. If that wasn’t bad enough, the majority of debt loaded Canadians are depending on the value of their home to retire – not able to save enough separately.
Interesting enough, the Ontario Liberals saw this as an opportunity for another tax. Not sure how that fixes this scenario, but pat on the back for the multi-million dollar advertising campaigns they’re running to convince Millennials it will.
Started From The Bottom Now We’re Here
Mortgage rates are the lowest they’ve ever been, and predatory banks, brokers, and lenders are convincing Millennials to max out loans in order to avoid missing out on this market. While we’re not saying purchasing a home is a bad idea for everyone, we are saying that you need to do a little more leg work in a market like this. Traders always say commodities are a zero-sum game, in order for one person to make money, they have to take it from someone else. So be careful in deciding which side of the trade you’re sitting on.
Let’s Have An Honest Discussion About Real Estate
We’re exploring the housing issues Millennial face in Canada from all angles. Like our coverage? Like us on Facebook to get updated on the next post. Hate us or think we’re wrong? Give us a tweet and let the discussion begin.
Yeah, okay. I’m sure they’ll raise interest rates when CIBC is selling negative yields.
I don’t think you understand that the private bond sale CIBC conducted was not for regular people, and it was to raise more capital for more mortgages.
Real estate lover, candy aficionado, and Toronto Editor.
These are very cute. Could you give a little background on your economics background?
Are your points wrong, not necessarily, but are they VERY complex topics? Indeed.
The simplifications here are INSANE, were they written by Donald Trump?
Inter-generational money is part the increase in available funds.
There is also a wording error of some magnitude. Canadians are not spending 164% of their income, they OWE 164% of their annual income. That is up for sure, but it’s up from an average of 100% 20 years ago. If you were to frame it as income over the life of your mortgage of 25 years that debt would be 6.56% of your total income. No one loves paying mortgage, but I think you can afford 7% of your income to pay for your house.
There is a fair chance that there could be a serious crash / correction sometime in the future, but it’s NOT going to be for the reasons you presented (in the way you are analyzing them).
Question for you
What information did you gather to determine at risk zones?
I doubt you have everyones mortgage rate and amount.
Are you making mortgage assumptions based on house prices?
it would be nice if the map showed the neighborhood name when you hovered over it.
Just a correction with your debt load numbers. Above you use 165%, then you say 164% (and as David above points out, it’s borrowing, not spending). And in your same article on Vancouver you use 166% as the Canadian debt rate. Also, it says “we borrow 65 cents for every dollar we earn” but that would mean 65%. Should be $1.65 for every dollar we earn. There is definitely a decrease in credibility when the numbers keep changing and careless errors are left uncorrected.
Like another commenter above, I’m curious as to how you have the at-risk amount by neighbourhood (i.e. what is the source). And I will also echo that it would be nice to see the hood name when you hoover. And it would be nice if you addressed some of these comments. Otherwise, people aren’t going to remain engaged (I won’t bother commenting again if it’s just going to be ignored). Nitpicking aside, I was interested to read the article and liked some of the points, so keep at it!