Canada’s real estate bubble is bursting quickly as interest rates rise, and peak buyers are having a tough time. Canadian Real Estate Association (CREA) data show that the domestic market peaked in March 2022. I ran the numbers to see how many stocks the month’s stock buyers had at this point. Most of the typical peak home buyers will be in the water as of last month.
Underwater mortgages, and the ratio to loan value
Mortgages are submerged when the loan-to-value (LTV) ratio is 100% or higher. in plain English? In case of default, the value of the home is insufficient to cover the loan. Lenders are in a tough spot here as they have nothing to back their loans. In general, Canadian mortgage borrowers have substantial assets, which results in relatively low LTV ratios.
Underwater home owners need to pay to sell their homes. They still owe the remainder of the loan, regardless of the value of the house securing the loan. The borrower has to replenish the shortfall to make up for the shortfall. This does not include additional sales costs such as real estate agent fees, legal fees, or moving house.
Today we are looking at which markets will be submerged for first-time peak buyers. We use the national peak of March 2022, just before interest rates start to rise. We keep down payments to a minimum and use high ratio mortgages for the most part. Markets where a typical home is over $1 million require a 20% down on traditional mortgages. This gives lenders (and borrowers) more cushion during downturns.
Typical peak buyers of Canadian real estate are almost 10% submerged
Multiple benchmark home prices have fallen sharply since peaking in March of this year. A typical home dropped to $735,400 in October, down 15.3% (-$132,900) from its peak. Buyers who leave a minimum down payment will get 9.7% ($71,100) underwater if they buy during peak hours. .
Most of the Canadian real estate market (55%) is in the same situation when looking at key indicators. If October’s move repeats itself in November, 75% of the major index buyers will be submerged.
Ontario property buyers must make up to six-figure payments to sell their homes if needed
Ontario’s real estate market has gone from up to down. Converted to dollars, a typical Kitchener-Waterloo buyer was $146,500 underwater in October. Cambridge (-$140,000) and London-St (-$140,000) were by far the worst. Thomas (-$137,000) isn’t far behind either. To put it mildly, it sounds painful that he leaves home with six figures from a house in a small city at least an hour from Toronto.
Canadian real estate prices
Base prices for typical homes in Canada’s largest market.
Source: CREA; Better Housing.
Just because the market isn’t negative stocks doesn’t mean it was favorable. The BC Index has the most remaining equity in Vancouver ($138,100), Lower Mainland ($100,600) and generally Greater BC ($99,700). However, a typical home in these areas was well over $1 million as of March 2022. That means the minimum down payment was at least $200,000. I know there is a problem. Positive equities don’t always turn a profit, and equities fall below traditional mortgage thresholds. This can become a problem when trying to move your mortgage to a new lender.
Some low-end markets are still rising as credit expands in these regions
Not all major real estate markets have seen a negative move since March. Equity shares increased in PEI, Bancroft and Newfoundland. All of these markets are under $500,000, so they are still relatively affordable. Whether it’s worth it is another discussion.
Most of Canada’s peak property buyers are underwater
Remaining assets in October 2022 if a typical home is purchased in March 2022.
Source: CREA; Better Housing.
*Markets with composite benchmark prices above $1,000,000 in March 2022 were not eligible for High Ratio Mortgages and required a 20% down payment.
Negative stocks sound scary, but the only significant concern is the investor. The big mortgage lenders aren’t known for kicking out borrowers who make regular payments. They want your interest payments, not a house worth less than a loan. If you plan to live in that house for 10 years or more, defaulting isn’t a big concern.
Banks are fine too, as loans are usually guaranteed with a minimal down payment. A pain in the butt, but the borrower paid a good premium so the bank would be protected. However, the borrower still has to pay the full amount.
Investors are in more trouble, especially if the business case changes. Many aspiring landlords have opted for negative equity investments in the hope that the upside will offset their losses. While rising rents may help somewhat, interest costs and asset losses are also accelerating. This could lead more investors to consider cutting their losses or doubling down and replenishing.
investors represented in between 1/4 to 1/3 of the market, It means that there is a possibility of big loss.Especially in further headwinds such as global mortgage regulation, and rising interest rates.As Bank of Canada warned yesterday, the amount of risk is getting harder to overcome. Not systematic, but not easy.