Hi Ross, I just read your article about the state of the Canadian real estate market and mortgage industry, and I thought you would like a ‘view from the south’. A few things:
- Was surprised at how low CDN rates still are. Ours have gone up to about 4.5 for the best qualified people for a 30 yr fixed (which is what most people here take). Rate is a bit lower if you go for a 10 or 15 year amortization, but still higher than Canada.
- Reason ours have gone up is unemployment has finally dropped to between 7-8% depending where you live (still pretty high though), and market consensus was that housing prices hit rock bottom and rates were going to go up, so people suddenly started buying houses again.
- Our house prices, while still a bit off 2007-8 peak, have gained about 60% in last 18 months. New houses that couldn’t be sold are suddenly being snapped up same day they are offered, and we’re talking large houses in the 800K to 1.5M range. (I know that’s cheap for T.O. area, but that gets you up to 5000-6000 sq ft with ¾ acre of land – once you get past 2M you’re into massive estates).
- Inflation is starting to kick in across the board. Our food prices alone are up about 30% this year, gas is on its way back up to record levels, and overall my sense is that most things have risen by close to 10% this year already.
- I think the Bank of Canada is looking at the changes in the US market and realizing that our rates are right on the edge of shooting up a few points in a very short time frame (I wouldn’t be surprised to see rates between 7-8% within 18 months, because that is what it’s going to take to start reining in inflation and the rapid (panic-driven) rise in house prices. I wouldn’t be surprised if rates went over 10% within 3 years. Assuming I’m even close to right, Canada will have to follow fast, even if rates stay a bit better up there, or all the investment capital will flow south (and I mean all).
- I wouldn’t want to imagine how the CDN market looks with all those million dollar mortgages being adjusted up from 3% to even 6 or 7%, let alone 10. Most of Canada’s young middle class will be out on the streets, just like in the late 70s early 80s, because we both know that people are buying as much house as their monthly payment will get them, and few people have 5K+ to spend on a monthly mortgage (after tax too, and with no interest deduction – yikes) for an 800 sq ft condo.
On the plus side, my house has gained back a couple hundred thousand in value, if not more, and I could sell it in less than a week now, possibly with competing offers (although usually that’s only in the best neighborhoods). Wish that was true 3-4 years ago.
I don’t think it’s that hard to predict what’s coming for Canada anymore with the racing locomotive that is the US (and in reality, our economy is still pretty weak – would be crazy if we really started gaining strength). Prices may finally settle back down to earth (25% correction, anyone?) when folks start walking from their mortgages.
The big variable here is the next presidential election, which will likely alter what should happen. The way things are looking, the Democrats will be slaughtered, unless the other guys fall on their swords again. They will do everything possible to forestall that, including keeping quantitative easing going to avoid a big jump in rates, but with our debt totally out of control and inflation roaring into high gear the choice may be taken out of their hands.
This has been a long time coming, and nobody thought the US housing market could collapse before it did ( I said it would, but most thought I was nuts), and I suspect Canadians feel they’re immune from it too. Of course, when you believe it can’t happen is exactly when it does, and the conditions are certainly ripe for it.
But you’re a financial guy and know all this. It’s just a matter of timing — when, not if. It’s reminding me of 1989, last time the Toronto market took a nosedive, only people are much farther extended on their debt load now than then. You’re overdue.
We have a college nightmare facing us down. We’ve been touring schools (hard to believe that our oldest finishes high school next year.) We are getting totally shell shocked by the prices — that’s another bubble that’s ready to burst. So not all is rosy here. But that’s another story.
Finally, my advice to Canadians would be to lock their interest rate for the longest period they can up to the payment/rate they can afford, and try to pay down their mortgage principal faster during that period so that if it resets higher, they can handle it. If they can’t afford a higher payment than they are negotiating to make now, then they probably can’t afford the house they’re buying. Bumpy rides ahead.
Thanks Ross, I thought you’d find this interesting. Paul Paetz, Atlanta, Georgia.
Paul Paetz is Innovative Disruption’s CEO and Principal Disruption Consultant. With his guidance, clients develop highly effective growth strategies to leverage disruptive innovation.
Here is a pdf version of this article – ideal for printing and sharing