According to the media, the vast majority of Canadians continue to have high loan-to-value mortgages (LTVM), but this is not the case. Average, Canadian LTVM have remained relatively consistent over the past several years: at approximately 57% of loan to value, which is hardly alarming.
As of the second quarter of 2020, the average LTV ratio in Canada was 56.68 percent. The LTV ratio is a key metric that measures the size of the mortgage loan compared to the value of the asset purchased.
Although it is true that many new home buyers experience ‘unaffordability’, the reality is that the vast majority of owners who purchased real estate one or more years ago did not face any such challenges. Indeed, given substantially lower interest rates on mortgages since the start of the pandemic, many existing home buyers have actually found their home affordability metrics have improved substantially, especially if they have taken advantage of the opportunity to refinance their properties at much lower rates than those loans they took out when they originally purchased their homes 1.5+ years ago.
Tracking Mortgage Debt versus 4.5 X income indicated is also misleading.
Although it is true that real estate prices have been rising over the past several years, and the ‘mortgage debt to income ratio’ has been rising, mortgage interest rates have been cut in half, compared to two years ago. Hence affordability has not been impacted significantly as a result, at least not yet.
A more relevant metric of affordability is a borrower’s ability to service his/her debt. Most people care more about how much they have to pay for their monthly carrying costs than how big their mortgage is.
Monthly mortgage payments for these exact buyers remain relatively the same as they were two years ago. The only difference is that now they are purchasing a higher priced property with a lower mortgage rate; whereas; in the past, they were purchasing lower priced properties with a higher mortgage rate. In short, this is a ‘net neutral event’, with respect to affordability of housing for those buyers.
The article also presumes imminent mortgage rate increases over the next couple of years, which I personally do not see happening in any significant way.
Yes, I do expect mortgage rates to rise slightly, but even if the Bank of Canada increases its mortgage rates by a percentage point, this still won’t make a huge difference in affordability.
Notwithstanding the above, there always remains a risk of some sort of geopolitical or financial “Black Swan event” which could cause rates to spike temporarily or because of which banks may temporarily refuse to lend.
Within either of the above scenarios, worldwide Central Banks and governments would be forced to act to stabilize the financial system, bringing rates down again as they have done time and time again in an effort to prevent widespread financial system unraveling and severe recessions.
However, I don’t foresee massive interest rates even if inflation continues moving higher as governments around the world would be focused on keeping interest rates low for the foreseeable future.
The end result would be a prolonged period of “stagflation” during which economic growth is low but inflation remains high.
This is exactly what governments around the world want to happen, but will not publicly admit as this would result in savers getting decimated.
Governments around the globe have loaded up on their own debts substantially over the past several decades and especially during the pandemic … so much so that there is no way that they will ever repay that debt. The only way out for them is to inflate themselves out of this fiasco.
Moreover, the Bank of Canada cannot afford, nor does it have any reason, to increase interest rates substantially as the cost to service municipal, provincial and federal debt would be astronomical, and would eat up a significant portion of government revenues.
Furthermore, the Bank of Canada and the Federal Reserve in the US will need to see: substantial improvements to our employment market; a much lower unemployment rate; and an economy firing on all cylinders before they will even consider increasing rates. Simply put: that is not happening anytime soon.
Finally, let’s not forget that the federal government has significantly raised immigration targets, and will reopen our borders soon; we’ll see over a half a million people moving into the country annually , and all will need roofs over their heads.
In the interim, there will continue to be a short supply of affordable housing units, including those in the low-rise, starter-home market.
So, we can expect the ongoing “high-demand, low-supply” real estate dynamics to continue for the foreseeable future. This will cause prices to escalate for the foreseeable future.
However, there could be temporary “blips”, such as temporary market corrections (9-12 months) or “flatlining” such as:
- In 2017, after the Ontario Liberals enacted their Fair Housing Plan legislation, there was a temporary housing correction of 6 months to 4 years, depending on where the property was located within the greater Golden Horseshoe;
- In 2020, at the start of the pandemic, there was a very short pause in the real estate market of only a couple of months, before the market shot up significantly higher yet again;
This year–the hardest-hit–Toronto condo market is also making a significant comeback.
If you look at any of the media headlines before or immediately after these events, all predict substantial corrections to the real estate market, but none of these predictions become reality.
Eventually, the real estate ‘bears’, including economists at CMHC, who have been calling for a large housing correction in Canada for over the past 20 + years will be right.
After all, no asset class can continue to rise in a straight line indefinitely, regardless of whether it’s real estate, stocks or bonds. The questions which remain are: what would it take for the market to correct in any significant way; and when might that happen (which no one can tell you with any degree of certainty).
Felix Vortsman CPA CA
Real Estate Investment Expert, Coach and realtor
Email: Felix@cloud9life.ca
