Front Loading: Canada’s Mortgage Rates Hit Housing Market amid Monster Rate Hikes

Over 50% of mortgage originations have been variable rate this year. Other mortgages are “fixed rate” typically for 2 to 5 years, after which they adjust.

By Steve Saretsky, Vancouver Residential Realtor, Stevesaretsky.com:

Another month, another jumbo sized rate hike from the Bank of Canada. Tiff Macklem and crew surprised markets with a 100bps rate hike, the largest move since 1998 when the central bank was trying to support a weak Loonie.

It was just two years ago when the Bank of Canada was rather irresponsible in encouraging the private sector to take on more borrowing, ensuring interest rates would remain at zero until the end of 2023. In the past four months, the bank has taken interest rates from zero to their target neutral rate of 2.5%, an incredible pace of change. While the bank is adamant they are “front loading” interest rates, there’s still another 100bps of tightening priced in for this year. This will have serious ramifications for the housing market, so let’s discuss.

One of the pillars supporting the housing market has been variable rate mortgages. They’ve been dirt cheap, averaging more than 150bps cheaper than the fixed rate mortgages [fixed for typically 2-5 years, after which they adjust, similar to ARMs in the US] this year. For this reason, we’ve seen an increasing number of new purchasers opting to go with variable rate mortgages. So far this year, over 50% of new mortgage originations have been variable, a historically high figure.

If you were going with a variable rate mortgage in recent months you were not subject to the higher mortgage stress test. Remember the mortgage stress test qualifies the borrower based on the minimum qualifying rate of 5.25% or their contract rate PLUS 2%, whichever is higher. In other words, with variable rate mortgages hovering around 3%, you’d only be stress tested at 5.25%. Compare that to borrowers opting for fixed rate mortgages, and you’d be getting stress tested near 7% (5% mortgage rate plus 2%).  Now you can see why a borrower would go with a variable mortgage.

Now that the Bank of Canada has raised interest rates by 100bps this will instantly bring the typical variable rate mortgage to approximately 4.2%, which means you’d be getting stress tested at 6.2%. In other words, the average home buyer just lost about 10% of borrowing capacity in one fell swoop.

It’s not hard to figure out what happens next. The pool of prospective, or rather, qualified home buyers, is shrinking.

While nobody knows where interest rates will end up, if you believe the market, Overnight swaps are suggesting the Bank of Canada will hike the benchmark rate to 3.75% by the end of this year. While I remain skeptical the Bank will get there, it’s worth noting that would equate to a 350bps increase in interest rates this year, which is approximately the amount required to trigger most fixed rate variable mortgages.

In case you need a primer, 80% of all variable mortgages outstanding are “fixed payment variable.” The monthly mortgage payment stays the same until it becomes negative amortizing (not enough principal being paid down), this number tends to be roughly 350bps higher than the original contract rate. How many households are prepared or even aware that their FIXED payment variable mortgage can and will reset higher when the bank inevitably raises rates again in September?

Perhaps a subtle reminder that Canada’s private sector debt/GDP sits at 235%, a figure even higher than what Japan experienced at the peak of their bubble in the 1990s when the Imperial Palace was worth more than the state of California.

It’s no wonder housing sales and prices continue to slide. The latest national housing figures for the month of June show a 24% decline in home sales from last year. And benchmark prices declined 1.9% from last month, the largest seasonally adjusted monthly decline on record. Larger than during the Financial Crisis, larger than 2017 mini downturn, and these figures don’t account for the latest 100bps increase in rates.

I don’t know how this ends, but assuming the central bank stays the course on projected rate hikes then you can kiss goodbye any notion of a soft landing. Housing and therefor economic forecasts remain wildly optimistic. By Steve Saretsky.

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  91 comments for “Front Loading: Canada’s Mortgage Rates Hit Housing Market amid Monster Rate Hikes

  1. J-Pow!!! says:

    America is a totally different country!!!! We will have a soft landing!!!!!

    • Phoenix_Ikki says:

      Definitely don’t doubt you’re ever wrong Papa Weimar Powell, you were totally right about inflation, raising rate…etc. We will have that soft landing just like Malaysia Airlines Flight 370

  2. Phoenix_Ikki says:

    “I don’t know how this ends, but assuming the central bank stays the course on projected rate hikes then you can kiss goodbye any notion of a soft landing. Housing and therefor economic forecasts remain wildly optimistic. ”

    One can hope for maybe it will be a once in a lifetime bang to the downside. I mean is it so much to ask for home prices to match or come closer to fundamentals so regular people can simply afford a house without leveraging their first born or kidney or happens to be lucky enough to time the market at the right time?

    Hopefully the US housing market will follow this big bang to the downside as well. It’s simply insane to look at majority of the neighborhood in SoCal and all you see on Zillow is $1M and up as if everyone just got gifted a multiple millions and pricing a home at $1M is just a lazy exercise of rounding up.

    • Seba says:

      Not sure how that would look in the US but in Canada real estate and construction are an unreasonably high proportion of the countries GDP. Home prices falling massively will take the entire economy with it. “Reasonable” home prices won’t matter to most regular people because they’ll be jobless.

      • georgist says:

        Typical Canadian response

        > oh but we are thinking of the little people who will lose their jobs

        In what world do you think this misallocation ends well? If you keep misallocating for another year it will suddenly be ok? Two years?

        The best time to end this farce was 5 years ago. The second best time is now.

        Put on your Canadian big boy pants.

        • Jon says:

          That was just… mean. What Seba is saying is that the Canadian economy is over reliant on real estate and construction.

          I think comment sections seems to invite the worst in human nature.

        • georgist says:

          There’s nothing “mean” in my response at all. Canadians need to wake up to the fact that their housing wealth is *fake*, it’s damaging the country and it’s a matter of time until reality resumes. The sooner, the less people impacted.

  3. Flea says:

    On the same continent

  4. Michael Engel says:

    1) Teaser in the freezer.
    2) When a bank sell a $500K loan it’s become a memo pcs after 90 days
    delinquency. In a good market, houses are sold at higher a prices and higher teaser rates.
    3) In a bad market the bank accumulated a pile of bad loans.
    4) The bank will do its utmost to avoid the recycle bin.
    5) AAPL in the freezer.
    6) We are not in recession because central banks baked an AAPL tart for dinner.
    7) When the big whale will offer us his American apple pie, SPX will gap down.

  5. Bloemie says:

    I have being renting after last years batcrazy market and started looking again, but to say it seems just chancers and charlatans is an understatement. Those that bought, slapped a coat of paint and desperate to sell, still trying to make 30%

    A big part of the problem is HPI house price index released from the real estate boards (CREA etc) and usually quoted are “adjusted”. Kind of like tweaking that inflation basket to show what you want. I think if real prices were uses, we would see more immediate effects and people would be more willing to lower prices now and sell vs hold out. The limited non HPI pricing you can find, shows heavy declines in median prices in the 20-30% range already.

    • Depth Charge says:

      This is a wonderful time to pull up the mls and laugh at the expense of all the speculators whose pressboard boxes are languishing with no offers – and no prayer of any as they follow the market all the way down.

      This happened last time, too. My mother used to live on a cul-de-sac, and last bubble every house except hers and one two doors down sold at peak pricing. She and I used to marvel at the willingness and ability of all these nouveau wealthy up and comers to pay such exorbitant prices. Turns out they were all speculators, and every single one lost the house to foreclosure, which amounted to 5 or 6 houses on her street alone.

      • Phoenix_Ikki says:

        Hoping this will be one of those history repeat itself scenario, especially in insane markets like Boise to completely unaffordable markets like LA, OC and SF.

        If I to swap playing slug bug but instead of getting punch in the arm for spotting a VW bug but instead a $1M+ house for sale, I think probably would have to be taken to the hospital by now

        • El Katz says:

          From Redfin News / July 14, 2022

          “Nearly two-thirds (61.5%) of homes for sale in Boise, ID had a price drop in June, the highest share of the 97 metros in this analysis. Next came Denver (55.1%) and Salt Lake City (51.6%), each metros where more than half of for-sale homes had a price drop.

          They were followed by Tacoma, WA (49.5%), Grand Rapids, MI (49.3%) and Sacramento (48.7%). Seattle (46.3%), Portland, OR (45.7%), Tampa, FL (44.5%) and Indianapolis (44.1%)–all of which saw price cuts for nearly half the for-sale homes–round out the top 10.

          Boise also had the biggest increase in the share of listings with price drops from a year earlier, when 25.7% of sellers cut their price. Denver, Salt Lake City and Grand Rapids were also among the 10 metros with the biggest upticks from a year earlier.

          More than half of those metros–Boise, Denver, Tacoma, Sacramento, Seattle and Portland–are among the 20 fastest-cooling housing markets in the country, according to a recent Redfin report.”

  6. TEMPLE says:

    It’s galling to me as a Former Prospective House Buyer that, at the start of 2020, houses were getting to a level I’d call “barely not financial suicide” when the Tiff and Trudeau Show caused prices in my area to go up anywhere from 50-100%, depending on house and specific neighbourhood. After waiting years to buy, I again just shook my head in disbelief, and walked away from the insanity.

    What stings me the most is how slowly the BoC reacted to runaway inflation. They are still miles behind the curve and moving like a glacier (even with this 100bp increase) but give them any excuse to drop rates and it’s done in seconds. Such are the moral hazards of an institution run by people with a vested interest in real estate appreciation and an inflation calculation that largely ignores asset inflation, I guess?

    • Bobber says:

      Inflation sparks revolution as large portions of the population have nothing to lose. Central bankers are playing with fire.

      • Depth Charge says:

        Have you seen what’s going on around the world? There are angry people and riots happening everywhere, it’s just that the mainstream media doesn’t want you to see it. It’s because of rampant inflation, especially in food and fuel prices. These central bankers have really done a number this time. And that’s why, all of a sudden, you’re seeing these massive rate hikes. They’re starting to soil themselves.

        • Augustus Frost says:

          Yes, the canary in the coal mine. Starting in the “periphery” with serious “blowback” spreading to the developed world.

        • Joe says:

          Sri Lanka enacted green regulations. And on top of that borrowed money from the Chinese for unneeded infrastructure projects. They are now starving: no fuel, no food, no jobs. But they have the top ESG scores.

      • Confused says:

        The politicians who do nothing about the central bankers are playing with fire, too.

        • Augustus Frost says:

          I’ve always assumed they mostly have no clue. Some are just bad people but not all of them.

          For starters, like the economic priesthood which misleads them, they seem to think that the developed world is exempt from the economic reality that applies to everyone else, both across time and geography. It’s the first explanation for the totally idiotic economic policies proposed or passed into law.

          Their economically illiterate constituents are substantially even less informed.

        • Brant Lee says:

          What wrong have the central bankers done the politicians except make them richer?

          When this all falls apart the politicians will bring the bankers before a government committee to play word games later if that will satisfy you. Everyone there will seem flabbergasted if that helps.

        • Sams says:

          In the end blame game loosing power may be a lot worse than be questioned by a governmental commite. If lucky you flee the country and still got the money stashed away. See Sri Lanka.

    • LK says:

      I wonder what also happened at the start of 2020.

      • TEMPLE says:

        Yeah, obviously, but I am also referring to the long, slow fizzle starting from around 2016ish to the start of the T&T Show. In other words, it wasn’t just the pandemic that made early 2020 marginally interesting for homebuyers.

        • LK says:

          Sure, I just see the Work-From-Home movement and mass exodus from cities as people could buy homes in cheaper areas as a significant factor in spiking home prices.

          Central Bank ZIRP was an accelerant for sure.

    • Bloemie says:

      I agree. Like anyone thought the price spikes were healthy and sustainable.

      When real estate, oil and commodities are pretty much Canada’s only remaining industry, and oil is out of favour, lowering rates/stimulus equates to RE mainlining and does nothing anymore for the rest of the economy. It just created a massive housing bubble, with no other place for the money to flow

      Only future I see is switching to fiscal and doing demand side stimulus vs supply side. We need thousands of new small business, not another amazon warehouse.

    • Billy Pilgrim says:

      I’m up here in Canada as well and fortunate enough to currently have a case study next door. Chinese investors purchased this particular townhome during the 2020 lull you described, paying, by my estimation, somewhere around $800k. It has remained empty, but they do occasionally have items delivered, which mysteriously stay on the doorstep for days (gotta love safe and secure Canada), and sometimes come visit their investment, despite a lack of furniture. I am not sure if these are a means of skirting the empty house taxes, but I wouldn’t doubt it.

      Around 10 days ago, something must have spooked their unending trust in the great, passive equity machine that is (was?) BC real estate, as a veritable pit crew of stagers, photographers, and real estate agents of all shapes and sized emerged.

      And there it was, listed conservatively at $985k, down a touch from the $1.1mil similar properties briefly touched 6 months back. But, unlike back then, it has remained, through no-less than three open houses and countless grinning men and women in suits on the adjacent drive-way. They are down to $890k as of today, and while others in the vicinity have chosen to ride-out the current gully by renting their units, my neighbours continue to race the BOC to a (il?)logical conclusion.

      As a renter myself, the schadenfreude should be the perfect accompaniment for my morning coffee, was it not for my sneaking suspicion, based on reading too many articles on this fine platform, that the babies (millennials like me?) are likely coming out with the bathwater of any impending housing crash.

      • Phoenix_Ikki says:

        Let me send your some of my schadenfreude from across the border to use on your neighbor. I am still holding out hopes I can my use my huge reserve for these type of Chinese investors in the states in the very near future.

        Maybe your neighbor wasn’t spooked but rather was also invested in Evergrande or whatever other Chinese RE companies that are in the middle of blowing up now.

      • Tony says:

        The Chinese don’t buy into falling markets of any type real estate or anything else. So on the downside or as prices fall the Chinese will not be there to backstop the housing market no matter how low it falls. This only leaves the locals with local income to bid. In Markham Ontario the same new townhouse is 2 million dollars not $800,000. Everything that is just built new will go without any bid or will just site on the market as the only buyers of any new stock were the Chinese. The ironic part is the more that’s built new in an up market the higher prices go as supply means nothing when the Chinese are buying as prices rise but in a down market as prices fall any new builds will skew the overall prices a lot lower as the Chinese won’t be there to buy them.

        • Niko R. says:

          Anecdotal evidence from the belly of the beast says otherwise – it is about the price. In my Toronto neighbourhood most houses are Chinese and Iranian investments. Mostly huge mansions. They are populated by elderly people with dogs. There are few original owners in original houses, also elderly, but with cats. And us, the renters with three kids, on the land of the benevolent Chinese lady landlord from over seas. This spring, a handful of mansions popped up for sale in our quiet, little circle for 4.5 – 6.2 million. Nothing sold. Then three days ago another neighbour placed his house for 3.5m (last year he tried for 4.5m or so), and it’s been three days of endless Chinese people in cars, on foot, with agents, alone, from the front, from the park behind, taking pictures with phones. It is frenzy. Other neighbours adjusted down by 10-20% within two days. Now 4.5m became 4m.. The Canadian housing tippity top top top is crashing, but the price still sells.

    • georgist says:

      What I found the most disgusting was the reaction of regular Canadians who already own a home.

      It showed me that many are basically Americans.

    • Old school says:

      There is a large gold industry mostly based on the observation that governments can’t be trusted with running sound finances.

      I am about halfway through Barrick’s annual report. It’s about 200 pages and goes into extreme detail on their business plus a good overview of gold market. Bottom line is cost to produce an ounce is $1100 and market value is currently $1700. I think a rich deposit only yields 1.7 grams per ton of earth.

      It’s interesting to read details of who buys gold. If I remember correctly biggest buyers are central banks diversifying their holdings out of dollars.

  7. SoCalBeachDude says:

    It is very encouraging to see mortgage interest rates moving towards normal rates of around 6.00% from which they should never have deviated either the to upside or the downside over the past 50 years.

    • Augustus Frost says:

      It’s only because of government guarantees (like mortgage and deposit) that 30 YR fixed mortgage rates even exist

      In a mortgage market not distorted by government policy, only those with fixed long-term liabilities, like pensions and insurance companies, would buy it other than to speculate on interest rate movements.

      It’s not an accident that hardly any other countries have long-term fixed mortgages

    • Old School says:

      I heard that if you are pristine in credit and put enough down that there are places you can get a 4.5% mortgage. Mortgage business is so slow maybe it’s true.

  8. SoCalBeachDude says:

    Both the Dow and NASDAQ should close down about 200 today as the reality of the vastly worsening global depression starts to sink in.

  9. james wordsworth says:

    One hops that out of all this the size of new houses (the big ones that is) gets chopped down. The obscene size of homes these days was purely fueled by cheap rates.

    Now with higher rates and higher construction costs, maybe the “marble counter top” era can come to an end, and we get back to homes as homes – and not as show pieces.

    • phillip jeffreys says:

      If you can’t afford to drive anywhere, why not a show piece home?

  10. Michael Engel says:

    1) The Dow and TSX made a rd trip to 2020 high.
    2) Canada 3M is 2.58%. The 1Y is 3.32%, the mid and the long duration
    are inverted.
    3) Weyerhaeuser is down to June 2018 peak.
    4) Suncor breached 2020 peak, but Imperial oil, CNQ and CVE had an
    amazing bull run.
    5) Inflation saved the Canadian oil co from the abyss, but the rest
    are struggling.
    6) It’s all about power : violent strikes vs deflated profits.
    7) US supreme court might support owners rights to defend themselves.

  11. Adrian says:

    Reading the comments in the comments sections or listening to the talking heads you would thinks rates are going to 20%. Rates are barely above zero yet people are already crying and moaning. Why?

    • Harrold says:

      Unemployment rate is 3.6%.

      • kam says:

        Government inflation rates and unemployment rates are all propaganda.
        In Canada, McDonalds advertised and sold the Big Mack Meal with change back from a C$1 (pre Loonie) in 1970.
        No one is seriously going to claim that that meal is any bigger or better today, now that is around C$8 bucks.
        Up 800% in 50 years. Uh huh, sure government bureaucrats and politicians, we believe the message you send out to the hinterlands.

    • Cyrus says:

      Read the article. Because a single 1% increase reduces buyer borrowing capacity by 10%. Is 10% a big enough number for you to notice?

    • Augustus Frost says:

      Because most people are actually broke?

    • Wolf Richter says:

      Because home prices are so high that rates “slightly above zero” take lots of potential buyers out of the market. And to find enough buyers, prices are going to have to drop.

      In Canada, there is the additional issue that payments of existing mortgages might rise as rates rise. So if you’re already maxed out with your payment, and then the payment rises, what are you going to do then? Sell the house? By which time you can no longer sell it for what you bought it for. So good luck.

      • georgist says:

        That’s what we want, some nice forced sales. Let’s have some layoffs, forced sales and a nice big crash.

        Am I being heartless? No. Prices should never have been allowed to get this high, the reversion was *inevitable*.

        • Hardigatti says:

          Georgist, careful what you wish for. A “nice big crash” likely implies that you’ll also be be out of work.

          I understand the frustration but in big crashes it is usually the average guy that pays the price. The top 1% may lose 50% of their net worth but will still live comfortably.

  12. Ghassan says:

    And people keep buying these overpriced houses not just in Canada but also in the U.S and elsewhere! Why? I get that it’s a slow moving train but at this point everyone have heard of the change in the regime, even the American MSM reports on the subject of house price decline nowadays although they still say the U.S is different!… still any average person can see what’s coming, so why people keep buying them!

    • Harrold says:

      Are they really over priced though? With current construction and labor prices?

      • jon says:

        It’s not if they are expensive or not. I think more relevant question is: Are they affordable ?

        If the homes take say 1 million to build, but people are just earning $65K, would they be able to buy ?

        People do get lost in the price to build but it is the general affordability which is key.

        • kam says:

          I don’t know what the cost components of land is, especially developed land for housing, since it is so much dependent on local conditions, but let me tell you that as a manufacturer for products specific for housing, all inputs are hugely inflated.

        • Brent says:

          Wife and I sold our house on Vancouver Island at the beginning of April with 4 over asking bids. We took the 40k over ask bid because it was cash. Then we drove to Calgary Alberta and painted the mother in laws condo and put it up for sale 3 weeks later. We finally got 1 bid 30k under asking after 2 1/2 months. The market has turned here. I’m now building a smaller house in Nelson BC a trendy mountain ski town where 350k gets you a crack shack and 700k gets you a 1970’s bungalow with some minor Reno’s. Lots of places over 1 million. However, listings are piling up and sales are few and far between.

          On Vancouver Island almost everyone I worked with had a racked up home equity line of credit. That is how people manage financially here. After paying their mortgage and monthly expenses there is little room left. If the car needs an expensive repair, the fridge blows up or the roof leaks it goes on the HELOC. Since values went way up over the years plenty of boats, trailers, SUV’s etc have been bought on HELOCS.

          Things are changing though. My son started working at a RONA in Nanaimo BC in May and has had his hours cut from 40/wk to 20/wk.

          Banks are currently advertising mortgage rates guaranteed for 90 days so just give it time- people are still shopping with 3% pre- approvals, wait till they can only get 5% then the show really starts.

          We have friends who have told us if they renew at 5% they are done financially. On top of that look at fuel prices at $2.15/liter and eggs at $7/dozen or car repair shops at $145/hr. It’s not even remotely sustainable.

      • Ghassan says:

        If they aren’t overpriced then why the decline in prices despite still in my opinion unreasonably strong demand?

        Artificially low interest rate was the anomaly that helped increase demand for already expensive housing market, the current rate is closer to normal historically and prices has to adjust, unless governments intervene again.

      • Augustus Frost says:

        Prices aren’t determined by costs, only in industries distorted by government.

        In the private economy (aka, “free market”), it doesn’t matter how much it costs to produce something or if it’s a (supposed) necessity. If the customer base can’t afford it, they can’t afford it.
        The producer either finds a way to lower the price while staying profitable or they go bust.

        With housing specifically, home builders are going to find themselves competing (metaphorically or literally) with someone’s empty basement.

        When credit conditions tighten sufficiently (whatever level that is), people will double or triple up.

      • georgist says:

        Construction / labour is the necessary part of a house.

        The overpriced part is the land, which is a considerable portion in urban areas. This part can and will fall.

    • phillip jeffreys says:

      It’ll be interesting to see where RE goes in many locals once the Blue State diaspora abates.

    • Phoenix_Ikki says:

      Because housing has become almost a cult like religion to some, just look at China. Even in the states, I would venture to guess 1-2 out of 3 people will know how to repeat that point of housing will always only go up gospel. It’s honestly quite tiring to debate these folks and assault to one’s intelligence.

      • Old school says:

        I am living in a small town with a lot of housing stock that is around 100 years old. It makes you realize that tastes and technology changes a lot in 100 years. Many were built for large families and look to be 5000 sq ft or so. All have a lot of square footage on porches because they were pre A/C, probably even pre electricity.

        You see a some that the homeowner just can’t keep up with the maintenance anymore. About half have been renovated and look beautiful, but they look like it would be a maintenance nightmare.

        The old houses I have lived in tended not to have closets and bathrooms and laundry rooms tend to be add ons in inconvenient places.

        Dream homes aren’t really forever homes unless you keep investing in them to keep them maintained and updated.

  13. Kunal says:

    Wake me up when home prices actually fall by a meaningful number, not half a percentage point. Many experts have been predicting housing crash for last 10 years. Most have been predicting over last 3-4 months. But home prices refuse to budge. I suspect if home prices will fall by 10% or even 5% Fed will panic and talk about lowering rates and investors will jump back on the Titanic. The party will carry on. Due to this now deeply ingrained mindset that Fed will always save all assets from crashing and so called investors from losing, asset prices will never fall.
    Bond market is already predicting Fed u turn inspite of record inflation month after month.

    • Flea says:

      Bond market is too big for anyone to control

      • Augustus Frost says:

        Most people share the absurd belief that
        central bankers miraculously become geniuses beginning in the mid-90’s or gained superpowers. As the equivalent of some economic priesthood, they have learned to “manage” the economy to ever increasing prosperity. It’s just another belief in economic central planning, but here it also includes those who supposedly believe in the “free market”.

        Central bank monetary policy rode the sentiment of the credit mania. That’s the source of their “genius”. If the mania is actually over, nothing they can do to prevent falling and later crashing markets or living standards.

        They abandoned traditional economic “orthodoxy” around 2008 (all except Japan who did so earlier). I’m assuming they will invent a new one, but it won’t make any difference.

    • georgist says:

      So you think if prices fall 5%, giving up a quarter of their gains in one year, the Fed will panic?

      What would lead you to this conclusion?

    • Brent says:

      Wife and I sold our house on Vancouver Island at the beginning of April with 4 over asking bids. We took the 40k over ask bid because it was cash. Then we drove to Calgary Alberta and painted the mother in laws condo and put it up for sale 3 weeks later. We finally got 1 bid 30k under asking after 2 1/2 months. The market has turned here.

  14. jon says:

    Housing in most of the world is a game of cheap money. If cheap money is gone so are the high home prices. Especially true for USA where almost all big ticket items are measured in monthly outlay.

  15. John says:

    I’ve lived in Toronto ALL my life (almost 69 years) and I’ve never seen anything like what’s been going on here over since about 2005. Even then (thought I, quite naively in retrospect) Toronto residential prices seemed to me quite high: about 200k Canadian, if that.

    The average “sold” price in TO is currently at 1.1 million Can. These aren’t mansions, btw. These are very, very average homes; what would have been considered “working class” abodes in the ’60s.

    https://www.zolo.ca/toronto-real-estate/trends

    Across lake Ontario in Rochester NY you can buy a 5 bedroom house in a high end upper middle class neighbourhood for 400k US. So . . . completely different universe.

    You can talk about Toronto being a “world class” city, etc. etc… but NO… there’s something amiss in these numbers. Rosenberg (who’s been pretty conservative on the nature of the “everything” bubble) recently used words like “catastrophic” (correct me if I got that wrong, but something along those lines) to describe the economic consequences of the 1% rate hike.

    Truth is (my personal view) is that the rate hikes are too little, too late. I feel, somehow, that the chickens are finally coming home to roost. The business/economic crisis of 2008 was not remedied in a fundamental way. It was merely papered over, both figuratively and literally.

    • The Real Tony says:

      The average sales price in the greater Toronto area has fallen to 1.1 million not in Toronto per se.

  16. Michael Engel says:

    Delta bought 100 planes from Boeing.
    The worst mistake Canada made was selling Bombardier CS300, – the world best regional plane, – to Macron, for free.

    • kam says:

      Canada loves subsidizing planes, Avro Arrow, Canadair, Bombardier, then selling them to competitors on the cheap or destroying them.
      Reminds me of the Western Canadian saying about Quebec leaving.
      ” We welcome Quebec leaving, but the condition is they have to take Ontario with them.”

      • Old School says:

        The world seems like a joke sometimes. When I was a kid the US was spending billions warring in Vietnam. Now our state N. Carolina is giving a company from Vietnam $1 billion in incentives to build an EV plant that’s going to build SUVs.

    • Apple says:

      Boeing sued Bombardier and won. Said they sold planes for Delta too cheap. They had to sell and relocate to the US.

  17. Augustus Frost says:

    Canada is on the same interest rate cycle as the US, roughly. If the interest rate cycle bottomed in 2020, then rates are destined to “blow out” years from now, past the last peak since the fundamentals are far worse.

    It doesn’t matter what the BoC does or doesn’t do. Any attempt to suppress rates contrary to this cycle will lead to a falling or crashing currency.

    If the cycle really turned, it’s time to start paying the Piper. No discounts or freebies either.

    • john says:

      Absolutely.

    • georgist says:

      100% correct. This is the dynamic. BoC must follow the Fed.

      If they do not CAD will fall, leading to inflation, as all Canadian goods are effectively priced in USD.

      The BoC do not set Canadian interest rates. 99.9% of Canadians haven’t figured this out.

  18. eg says:

    I agree with your conclusion completely, Wolf — Canadian recession inbound …

  19. georgist says:

    My main concern is the Fed will continue to hike and at some point the BoC will refuse to follow.

    This will then lead to a big drop in CAD, increasing monthly costs for everyone by more than raising rates would have hit a subset of the population.

    I’m strongly considering putting more into USD.

    I can see from forums that most Canadians still believe their housing market will hold up. They are insane. The only cure is a crash.

    Stay strong, daddy Powell.

    • The Real Tony says:

      That would be the most likely scenario as its a given the Canadian economy will falter long before the economy falters in America due to the different in personal debt levels between the two countries.

  20. Mike Herman Trout says:

    Coming soon to a theatre in Australia…

    • Wolf Richter says:

      Core Logic has been reporting on the house price declines in Australia for a few months. Still up year-over-year, but down month to month in the major cities. So this seems to be already happening in Australia.

  21. CreditGB says:

    This is a 20 year old movie, it was in every theater.

    Squeaked in under the wire with the “stress test” eh? Figured the rate wouldn’t change before you sold out at some huge profit, eh? Suddenly your palace isn’t worth what it was last month and is falling, eh? Now your ARM is going up beyond what your inflation ravaged income can pay, eh?

    Next, sell out, put it up on the market and watch as no one shows up to look at it.

    Uh oh,….

  22. The Real Tony says:

    The Chinese don’t by into falling housing markets no matter how low the prices falls. Most of them don’t work, none of them own stocks and most don’t own businesses so recessions don’t affect them. Now only the local money will come into play until home prices go back up and the Chinese are one of the last ones to start buying. When they do all of them will pile in at the same time driving prices like 10 to 20 percent higher in just one month. The Chinese only buy into rising markets especially markets that skyrocket they don’t buy into falling markets no matter how low prices fall.

    • Old School says:

      Sounds like Americans as well, except we like buying stocks when prices go up as well.

  23. Cookdoggie says:

    Seems like the author’s message is that this is all a bad thing. It’s not.

  24. Tina says:

    2.5% Bank of Canada rate is still too low and is a joke. Even back in 2007, the Bank of Canada rate was 4.5% and inflation was in the 3% or so range. We need to get back to a 5.5% to 6% minimum Bank of Canada rate like now, right now or inflation will be 6%, 7%, 8%+ for years.

  25. Doug says:

    Tina, this is why I am guessing that more likely the Bank of Canada rate will be 3% to 3.25% in coming months, maybe 3 to 5 months. This will mean our money maturing in GICs, RRIFs, TFSAs that are currently 3.25% to 3.5% will be making 5.5%. We will likely lock in for 10 years which are 5.00% to 5.15% for 10 years currently and hopefully 5.5%+ by maturity. Our GICs, RRIFs, TFSAs will go a long way now for my wife and my retirement.

    • Gary says:

      I agree interest rates have been too low for too long and it only rewards bad financial behaviour and punishes prudent, forward thinking people and their families. It also gives a false sense of security that all you have to do is borrow and debt binge and low interest rates would be there and no interest rates will not increase. The belief that cheap money, easy money forever will be there, we have clearly seen this is not the case many times now. My friends and family don’t know what I am about to post here but as clean up crew worker and delivery driver for 20 years with 2 companies now and my wife never had to get a job outside the home taking care of our 2 kids now 16 and 15, we have done pretty well for ourselves. We have planned ahead when we were young for what we wanted for our lives and how to get there. I don’t have a benefits package at work and don’t have some pension plan with my company or with the government, I am just a straight full time worker in the private sector.

      We have learned to avoid all the noise as it is just a bunch of distraction for what you do in life. The bottomline is I worked and still work 6 days a week, 52 hours a week but 44 hours the week only the final Saturday each month. Basically, I do get a Saturday off ever 4th Saturday of the month. I also get 2 weeks vacation pay, time paid throughout the year and take them during each long weekend here in Canada. We have just pasted a major milestone in our lives, we are debt free, mortgage free own now a modest house in eastern Ontario which we now lived in for 20 years and have reached the $400,000 mark in our total interest generating deposits in GICs, RRSPs, RESPs, TFSAs, term deposits and a total net worth of $1 million. We also have achieved a interest income/compound interest intake of $15,000 a year= to 27% of my annual gross working income. I am only 43 and my wife is 42. By the time I retire at 60 to 62, it will most likely be 90% without my CPP, later our OAS.

      This took alot of hard work, discipline, time, patience and record keeping to keep it all together and make sure this all happened for us. There are alot of doubters out there that will derail you even trying and basically ignore them and do the best you can with a plan and support with your family throughout your life. Life is too short to get bogged down by people that only want to give you problems.

  26. Frina says:

    I personally think the whole money system is corrupt and we are all slaves in a system they created so they, those elites in charge do not have to work and make us beg for crumbs.

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