Canada’s Real Estate Market – Going Down?
June 20, 2010 – 7:49 pm
The Canadian real estate market has seen monumental price increases over the past decade but have Canadians reached the limit of how much debt they can service in order to finance these ever increasing home prices?
Prices Well Above Long Term Averages
Currently across Canada you can find homes priced anywhere from 5 times a families’ annual income which is the case in Toronto to the ludicrous Vancouver market where real estate prices have reached over 7 times the average annual income. The long term sustainable average and the general rule of thumb is that you should only leverage 3 times your combined annual income when buying a home.
Canadians More Leveraged Then Ever Before
Never have Canadians been more leveraged with personal debt in the history of Canada with 1.48 dollars of debt for every dollar of disposable income. Record low interest rates have helped fuel demand for real estate but is this near zero percent interest rate policy from the Canadian central bank’s Marc Carney actually helping or hurting Canadians in the long run? And a better question is does it help banks or Canadian citizens more?
Only One Way For Interest Rates To Go
With the prime rate so low many questionable borrowers have been able to enter the Canadian housing market and help propel the demand side of home sales higher. With only one way for interest rates to go and a worldwide economic recovery seemingly stalling (including Canada’s main trading partners) it is hard to paint a picture where this never ending rise in real estate prices can continue forever.
Pulled Forward Demand: Who Will Buy Now?
With so many of the buyers in the market already pulled in due to the record low interest rates and with baby boomers set to retire over the coming 24 months “:house rich” but retirement “cash poor” the question is who is going to continue to power the demand side to keep real estate prices this high?
Deficit Fueled Recovery Is Not Recovery
With a $50 billion dollar deficit from the Canadian federal government stimulating the economy and the CMHC guaranteeing many risky mortgages for banks (95% LTV ratio ammortized for 35 years) it’s clear the Government of Canada has chosen to play an “extend and pretend” game here to keep the real estate market inflating while through CMHC insurance programs making sure if things go bad banks will get bailed out with Canadian taxpayer money.
Higher Taxes, Less Services
It’s not just the Federal government that is running deficits as the Government of Ontario ran an over $20 billion deficit of it’s own and says it can’t balance it’s budget before 2017-18 (all other provinces are also running deficits). They also say they will not cut services which means only one thing, that your taxes will be going up to make up for these shortfalls in the budget. Municipalities are also hurting and in many cases running deficits like the City of Montreal which has a budget shortfall of over $400 million in one of the highest taxed regions in the world.
What About The Babyboomers?
With interest rates only able to stay at current levels or rise, with baby boomers retiring and in many cases hoping to unload their property to buy a smaller home and get some liquid cash to enjoy their retirement and in an environment where the world economy is on shaky ground including Canada’s where multi year budget deficits will require raising taxes or cutting services it’s hard to imagine how this raging bull market in real estate can continue.
Don’t Believe Everything You Are Being Told (Sold)
Don’t believe the hype, Canadians have spent themselves into a personal debt level that is a record for Canada. Governments are broke needing more money from you to pay out entitlement promises they have made. If you are planning on buying a home levered 20:1 in one of Canada’s hot real estate markets because “it’s different here” I advise you to run the math for yourself.
Even a 10% correction in real estate down like TD bank among others is calling for (and that’s optimistic in this author’s view) that’s enough to put you under water immediately leveraged to this level. And in Canada you can’t simply walk away from your mortgage like you can in the United States. Now is the time to be cautious and liquid not the time to be a hawk.
More Information:
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1-866-686-9929 and speak to a customer service representative. We have licensed real estate professionals on staff ready to take your call right now.
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