Canada’s got ninety-nine problems and mortgage debt is…. Over two trillion of them. Bank of Canada (BoC) senior deputy governor Carolyn Rogers addressed concerns about financial stability earlier today. She boiled it down to two major concerns that have been present for a long time, but are building up — household debt and housing. She warned the coming months can mean some pain for homeowners, but it’s necessary to restore balance to the country’s markets.
Canada’s Financial Stability Threatened By Home Prices & Debt
The BoC senior deputy governor focused on two specific areas that present financial stability — household debt & home prices. They emphasized neither problem is new, and the central bank’s reports have mentioned these issues as far back as 2006. A lack of disaster so far doesn’t mean it’s not a concern, but the exact opposite—the vulnerability is building up in the system. What could have been a minor issue back in 2006 is now a very large issue, as housing consumed Canada’s economy.
Rogers explained there were significant concerns about affordability and investor speculation prior to the pandemic. When the pandemic hit, issues that were primarily between Toronto and Vancouver spilled out across the country.
“Over the course of less than two years house prices went up by more than 50% in most markets. And housing activity—the number of houses being bought and sold—was about 30% higher than pre-pandemic levels,” she emphasized.
An important point, since this wasn’t a period of weak activity that low rates were trying to stimulate. Low rates stimulated activity stronger than normal, and the market kept pumping the gas on more stimulus.
Front Loading Rate Hikes Will Reduce How High Rates Will Go
Pumping the gas while the economy is booming is the easiest way to ensure inflation surges higher. We had significant inflation prior to the invasion of Ukraine, which sent it into the stratosphere. Moving slowly was compounded by a crisis, forcing the need for immediate action.
“We have moved interest rates up quickly because history tells us that front-loading rate increases gives us the best chance to cool the economy quickly and keep inflation expectations anchored. This avoids the prospect of larger increases down the road,” she explained.
Though she didn’t elaborate on this point, it’s textbook monetary policy. The slower rates are hiked when trying to cool excess demand, the higher the risk of interest costs being incorporated into inflation. It results in something called an “inflationary spiral,” where inflation and its attempted mitigation measures create a cycle that’s hard to break.
“We have a long way to go to get inflation back to target, but there are some early signs that monetary policy is working. Unfortunately, this adjustment is not without some pain. We recognize that,” she warned.
Canadian Home Prices Need To Fall To Restore Balance
Canada’s homeowners have been dealing with the fallout of this, especially those misled into thinking rates will be low for longer. Not a large share of households she noted, but more than typical have opted for variable rate mortgages. Those buyers are now paying rates significantly higher than expected, with interest now swallowing most of the payments. Fixed rate borrowers aren’t immediately impacted by higher rates, but they’ll be facing higher costs at renewal. In short, homeowners will pay a lot more soon.
At the same time, the excess credit that helped boost investor demand and home prices has led to a toxic market. Circling back to her initial point, homebuyers were already facing a lack of affordability, compounded by a 50% increase in home prices. Not just in Toronto or Vancouver, but right across the country. Technically, home prices are going to have to come down, and surprisingly that’s what the BoC said today.
“We need lower house prices to restore balance to Canada’s housing market and make home ownership more affordable for more Canadians,” said the deputy governor. Adding, “But lower house prices may add stress for those people who purchased recently. They will have reduced equity, and this may limit their options to refinance.”
Short-term end users are likely to experience the least pain, since they won’t be exiting their position for years. However, the investors that entertained very immediate positions can face immediate liquidity concerns. Especially if they’re in the pre-sale segment, and have yet to actually take hold of any housing they’ve committed to buy.
the boc infuriates me. they are the direct cause of the pain now and what is coming. they are without any integrity at all when they now turn around and tell us what we have to do to weather that pain is truly a disgrace. not for a moment taking responsibility for the decade long free money which created the bubble in the first place. i would argue economists are quite possibly the most dangerous people on earth and should be treated as such. their historical track record speaks for itself. lest we forget is something they never understood.
“We need lower house prices to restore balance to Canada’s housing market and make home ownership more affordable for more Canadians,” said the deputy governor.
I hope this will happen as a first time buyer fricking waiting for 16 years to buy my first home. However, seeing the video of Tiff 2 years ago promising lower rates….BOC has lost a lot of credibility.
At the same time our selfie leader wants to bring 2 million immigrants and good luck to them qualifying for anything in this country at the current salaries and house prices which are still higher than pre-pandemic years when they were high enough already…maybe they do want lower prices, who knows? sorry for my rant
Zero accountability from those that mismanaged the economy. And we are supposed to believe they are the people to fix it when they screwed it up.
This article ignores the influence of foreign money, or at least plays it down severely. Canada doesn’t really Have financial borders, so foreign money needs to be considered in these calculations.
You can stop with the xenophobic narrative. Most immigrants coming over have less money than Canadians.
You can be pretty sure he’s referring to non-resident investors, not immigrants. There is a tremendous number of non-residents who own property in Vancouver and other parts of western Canada. So much in fact that there is a federal tax department specifically for non-residents (non-resident withholding accounts division).
I don’t think he was specifically targeting immigrants. He mentioned foreign capital as a concern, which provincial governments actually have taken action on (specifically British Columbia).
You can stop with the virtue-signaling narrative. He never once said there is anything wrong with immigrants. He mentioned foreign money has a role to play in what happens. And it does. Like what happens with American investors, or what plays out in China, because both of these countries have huge investments in Canada and can easily have a major influence on our market. Just like the offshore money laundering that Canada hasn’t been willing to control has an effect. Also, if you are really worried about the new immigrants that are coming to this country, shouldn’t you be upset that they are being set up with modern-day indentured servitude just to even try and have a life here? Its disgusting what the BoC and the government have done to the cost of living in this country.
It leaked out of cabinet prior to Freeland’s fall financial update that increased immigration numbers were in part to raise/keep house prices high.
Better Dwelling has *literally* posted articles detailing how foreign money being washed in Canada had helped lead to higher prices. It was not all foreign money, to be sure, but external money coming in to be laundered certainly contributed.
https://betterdwelling.com/an-ultra-violent-cult-is-stealing-cars-using-canadian-real-estate-to-launder-fintrac/
Kate, how about you realize that it was not a ‘xenophobic’ comment. So stop virtue signalling.
He wasn’t referring to immigrants, he was referring to foreign capital flowing into the country as a safe haven. Learn to read
Finally, someone tells the actual truth.
Ok. But when do people start losing houses? I want the distressed sales to start.
Not going to happen. Most people are locked into fixed rate mortgages. Demand is still high for housing too. Those that can’t afford will list and sell and at current inventory levels the new inventory would be welcomed and scooped up by those waiting for nicer homes to hit the market. In the end prices have pretty much bottomed and will likely stay relatively flat for the next few years.
Slowly rolling 2017-2022 >>> 2022-2027 >>> the carnage starts around 2024/2025. It will depend on inflation and BoC rate during those times.
Is that because about half the 5 year fixed come due in 2024/2025?
I can honestly say I am not worried, but still slightly concerned about my payment change when my 5 year fixed comes due in mid 2024. If I feel the concern when I owe less than half of what my home remains worth today after the drop, I can only imagine what it will feel like to many others.
Well, take the QE years and 0.25% years and add 5years. Maybe even less for those that went private. Cross reference with the amount of new mortgages originated during the crazy bidding and you can get an idea of when it all implodes. Canada is reliant on new immigrants to pull the tax and housing cost train. At some point, those people will wise up and spend that money somewhere with better quality of life. Even if it’s less safe (say: any where else in the world).
Scary thought isn’t it. Big government and corporations all creating the illusion of lowering inflation rates while actually raising it — recession on the horizon, to refill government coffers. And like the crash of 2008 – the aquistions start again.
me too buddy, me too
when home and auto sales collapse (the drivers of Canada’s economy) interest rates will come down. Home prices I believe will go up, and you can be sure will also. The higher interest rates will have left many Canadian’s
poorer.
My personal best guess is that prices won’t crash, instead there will be more corporations and hedge funds that become landlords and go as cutthroat as they possibly can. “Permanent capital” is going to bid out regular people. It’s a great investment for them since they can pay cash (not pay interest – the worse interest rates get the better it is for them) then turn around and create predatory extractive rental agreements that squeeze maximal money out of people who need a place to live and can’t afford to buy. Their monthly return on investment will be excellent, and those extractive profits will impoverish a lot of renters.
This is a good synopsis. I agree this is the most likely path.
True that !
Well, we know what we need to do when that happens. These REITs have listed addresses.
It appears to me that there will be a major correction. Asset prices directly correlate to interest rates, so in the case of housing this also holds true. Interest rates have been consistently coming down over a much longer period (30 Years) thus home inflation. It appears we are entering an era of higher rates with it very unlikely to come back down to 2%. The people who were prudent and locked in will be caught on renewal and with the restrictive rules that came in in 2017, the owners renewing may be limited in trying to shop around which means the renewal rates will likely be higher than they otherwise would have been.
This will get ugly.
If you are a recent homeowner that is barely getting by, now would be a good time to exit, you likely still have some equity in your home.
[…] with further headwinds such as global mortgage regulation, and rising interest rates. As the Bank of Canada warned yesterday, it’s becoming difficult to get through the amount of risk. It won’t be systemic, but it’s […]
Tough times build character, bring it on!!
Over reliance on monetary policy has become incorporated into US economic thinking and I assume the same is true for Canada. The last decent opportunity to institute some macro-economic measures was after the 2008 Subprime crash. The US, however, decided to bail out the banks to the tune of $15 Trillion and do nothing macro-econ-wise — which was not wise. Now, people don’t even think of longer macro-econ improvements. Under Obama-Geithner, the US reverted a pre-Panic of 1907 Panic mentality.
You increasing interest rates for past 6 months so aggressively has brought down inflation how much? Ever wonder why?…Because the cost is passed on to the average Joe…and you take that cost as the price that determines the inflation % again… And what will happen when you dont increase it?stupid experts.