It’s also a misunderstanding to assume that the only reasons people sell homes are to realize return on investment or due to bankruptcy.

Multiple property investors will sell if they see negative future gains due to housing prices decreases cutting into capital gains OR decreases in rental prices (which follow housing prices). Keep in mind that high rental prices are being used to offset mortgage payments made by investors to ensure they earn an adequate return.

Foreign investors are likely to sell not necessarily if housing prices drop, but might do so if their capital access is squeezed (I.e. Chinese buyers trying to pull capital out of mainland China, or a downturn in the equity market that might make P/E ratios more attractive in equity and thus driving down the apparent advantage of housing investment).

Finally, home owners who locked in variable rate mortgages at low rates that already stress their finances are likely to see net negative cash flows if mortgage rates rise. One would imagine this only causes bankruptcy, correct?

No, that’s wrong. Bankruptcy is an extreme end of a spectrum of behaviour when housing returns run negative. Another obvious option, in the case of a small downturn in housing prices driven by an increase in variable mortgage rates is homeowners might sell at a capital small loss in order to rental at much lower rates. Keep in mind that at current prices, a person who buys to rent out a home is effectively paying their renter a subsidy. When rental rates are favourable, it will be rational for many people to cash in their homes and pay less for a rental thereby freeing up cash flow for lifestyle or other investments.

The important thing here is not to assume that any of these specific things will happen. Rather you have to recognize that when housing comes to be treated primarily an asset, there are all sorts of individuals who invest in the asset class and they have a wide variety of reasons to sell in order to realize equity for other purposes.

There’s really only one underlying transition that needs to take place for this to occur: future shocks to real estate outlooks must lead investors and home owners to imagine a net negative future outlook in real estate investment. If that happens-and a wide variety of shocks could trigger this-then housing prices and rents can go down for a wide variety of reasons.

It’s also a big mistake to think that the government controls this. For that they would need to have a level of economic prescience that has never before been seen from economists.

It’s anyones guess what will happen in the future. So hedge your bets and don’t over leverage yourself.

Nah. Most people here know the Smith Maneuver is an increased leverage risk compared to it just being regular HELOC debt.

It also makes a lot less sense to do when your mortgage rate is 1% like some variable products.

“The gov can’t let that happen, so they’ll do whatever it takes to keep it that way”

This thinking is precisely one of the reasons we’re in a bubble of magnificent proportions. The government pulled out all of the stops during the pandemic of ’20 to such an extent that worsened the housing crisis to the point it is now obvious to anyone paying attention. A country that can’t provide affordable homes to its people is not a great place to live and will become less attractive to would-be immigrants. A country that locks a third of its people out of being able to buy a home and forces them into paying off investments of the richest few is a terrible place to live.

20% of Canadians are now experiencing housing poverty, worse among immigrants. Think about this for a moment — rents are still catching up to price gains from the last two years, and the inflation of housing costs are still not fully apparent. What happens if prices keep going up? I’m a young highly educated Canadian and I already left Canada for a better quality of life because of insane home prices. I’m not taking a mortgage 5x household income of someone in the top 5% of income to buy a condo 2 hours from Toronto, no thanks. That’s poor value for my money on a global scale.

There are only a few ways out of this crisis: 1) rapidly scale production of homes (supply) and limit investor activity in all new builds, but Canadian government is unable to act fast enough, we’re not China who can build entire cities in a year; 2) absorb more risk and print more money, but this will only worsen the affordability crisis and increase inflation, creating a different national crisis; 3) strictly regulate RE investing, increase taxes on RE investing, dramatically increase transparency, and clamp down on foreign money laundering, which could in itself cause a correction; or 4) let the market do its thing.

The government could delay the crisis from coming to a head so long as the global economy was stable, but that period of history is over now.

Yeah, that’s not exactly how this works. Obviously no one knows whether the market will go up or down but you’re highly underestimating speculator fear. So many places are cash flow negative, so there’s no incentive to hold onto an asset that isn’t making money from appreciation. These people, plus the people who have to sell, will make the market price.

That said, most people I know who have a house aren’t thrilled about prices either because they recognize that it’s going to lead to higher taxes and that they’re stuck on their rung of the property ladder. Most people’s equity is stuck unless they’re taking out a HELOC. I think if prices fell we’d see more liquidity because homeowners who actually live in the place they own (remember those?), will have more incentive to move. Who cares if your property dropped in value if the place you’re buying also dropped in value… less real estate fees, less land transfer.

It’s a very shakey premise to say that the government cannot let home prices fall. If inflation persists a government may not have a choice to raise rates. Sometimes it isn’t within their control.

Home prices fall, you get no growth.

For the BOC to warn about this means it’s a much bigger problem than the general public will ever know.