Canada’s Cheap Mortgage Credit Is Fueling Higher Real Estate Prices… Again

Canadian real estate prices are rising again, and everyone is scrambling to explain. Sure, you make a compelling argument that [insert any city in Canada] is the next Manhattan. However, Bank of Canada (BoC) data reveals a more blunt answer—witchcraft. Just kidding, it’s the reintroduction of cheap credit and the leverage that comes with it. Interest costs on new mortgages fell in February, providing leverage similar to the boost in home prices the following month.

Canadian Mortgage Borrowers Are Seeing Interest Costs Fall   

Canadian lenders are seeing new mortgage loans with lower interest costs. New loans saw the average interest fall 0.12 points to 5.53% in February. Still higher than January, and the amount remains 3.14 points higher than last year. That’s less leverage than last year, but more than the month before. It’s an important point to hold onto as we dive further into the numbers.

Canada’s Mortgage Stress Test Has Little Impact At This Level

Canadian mortgage leverage is much more sensitive to interest rates at this level. OSFI, Canada’s bank regulator, has a mortgage stress test, officially called Guideline B-20. The Guideline ensures that borrowers can pay the higher of 5.25% interest, or a contract rate plus 2-points. It does a great job at throttling credit up to that 5.25% mark, but afterwards leverage fluctuates wildly. Every increase or decrease has an almost immediate effect on how much people can borrow.

It’s worth mentioning the stress test doesn’t apply to all mortgage lenders. Lenders that aren’t required to stress test make their own risk-mitigation measures. They often only use the quoted rate for calculations when the interest is above a floor. That helpful tip was a friendly reminder in my favorite mortgage app this morning. Reminding people they have access to more leverage has never gone wrong, right?

Anyway, still not clear on the stress test? Say you found a mortgage rate of 6.0% (your mortgage broker is terrible btw), meaning 8.0% is your stress test rate. Now your friend decides they’ll borrow a month later, and they get a 5.75% mortgage rate. Their stress test rate is now reduced by 0.25 points as well, and they get the additional leverage. 

Back when mortgages were 2 points and the minimum stress test was 4.75%, it didn’t have much impact. The floor applied, minimizing sensitivity to everyone but deep pocketed investors who aren’t stretching to hit their budget.  

Canadian Home Prices Are Tied Closely With Interest & Leverage

To understand why this is important, you need to learn that home prices are linked to leverage. How much does a home cost? When I ask people this, they often talk about input and output costs, population inflows, etcs. Do these people really think that’s the math Joe & Jane Six Pack do before placing an offer? Of course not, it’s how much they can pay. The more pressure, the more likely they are to exhaust the amount they can afford.

Even the BoC knows this, with a former Deputy Governor recently explaining how low rates helped borrowers spend more on the same housing. It was previously believed that falling rates provided a discount on interest. In reality, over the past 30 years, low rates didn’t provide a discount to buyers, it provided more leverage for sellers to capture. Prices inflated to fill the gap, for 30 years before someone finally did the math.  

Leverage means debt, and debt is spending the value of your future labor today. If you want a perfect recipe to raise home prices, you incentivize purchasing of a necessity and then let people borrow more and more of their future income to pay for it. Canada’s housing crisis in a nutshell, and it’s intentionally designed this way.

Canada’s Falling Mortgage Rates Resemble Recent Home Price Growth

Now, back to the uninsured mortgage rate above. A 0.12 point drop in February might not sound like a lot, but it would give a buyer roughly 1.2% more buying power. For a couple making $200k/year, that translates into roughly $11,500 more leverage. It’s remarkably close to the $12,300 increase the benchmark home made in March. Leverage is likely responsible for the entire increase. 

The BoC doesn’t have to cut rates for cheap leverage to be reintroduced, they just need to slow quantitative tightening. By failing to tighten government bond liquidity, fixed rate mortgages continue to fall and spark more buying power. 

On one hand, it might seem justified due to the banking liquidity crisis in the US. Apparently, households with unstable shelter are a lower priority than more cheap credit after history’s largest borrowing binge.



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  • Jimbo 1 year ago

    How many households make $200k though? It’s not realistic with a median income of $80k/year.

    • Trader Jim 1 year ago

      Keep in mind not that many houses are actually sold, and most of the new inventory is sold to a limited number of investors.

      A professional couple hits $200k, but with Canada’s narrowing opportunities, it means the median can never buy a house. Even in small towns in newfoundland, it would be stretch for a median household. Hence, most of those homes are being bought by investors.

  • Kevin Logan 1 year ago

    Tiff, Trudeau, Pierre, Jagmeet, and Freeland are more worried about getting a discount on their refinancing than shelter stability.

  • Mortgage Guy 1 year ago

    Precision. Good stuff. Hope you’re throwing your hat in the ring for mayor soon. It becomes more evident that we need smart people in charge, even if the average person is too greedy to realize it.

  • DC 1 year ago

    Great that you are finally understanding this. I saw a lot of commentary on how investors were the cause, foreign buyers were the cause and that demand side regulation is needed. Also prices are not sustainable and there is going to be a crash. Prices have stabilized and are even rising even though there is a spec tax, a foreign buyer ban, record supply and increase interest rates. Why?

    House demand will continue to increase due to a demographic household formation bulge (baby boomer echo) that is entering the family/home buying phase plus there is increased immigration. There is already pent up demand in the marketplace and it is growing. Demand side regulation isn’t going to reduce demand enough to affect prices.

    So prices will continue to increase unless we increase supply and/or we reduce construction cost inflation. So increasing focus on how to increase supply or reduce construction costs inflation is your best path on keeping prices in check. It’s a waste of energy to focus on investors, foreign buyers, or reducing demand.

    Cities seem to get it as they are trying hard to increase home ownership for the missing middle, increase the rental supply and increase affordable housing supply. Federal government doesn’t seem to get it as they focused on regulating foreign buyers which had the unintended effect of reducing some pre-sales which in turn reduces the feasibility of new condo housing supply. Australia was smarter about it and allowed foreign buyers to buy pre-sales to help spur development but limited purchases of existing housing stock.

    Feds have also done very little on affordable or rental housing. Increased rental housing supply isn’t financially viable without assistance and while CMHC rental programs are facilitating increased rental supply, it isn’t enough to meet the increasing demand. If you want to address our housing dynamics this is where you can make a difference.

    The next step is to understand that it is impossible to regulate real estate to the point that real estate prices are going to suddenly be affordable again.

    • Ash 1 year ago

      “Great that you finally understand this,” says man to Stephen, the person who has explained this in detail multiple times at government conferences since 2017, at the request of the government.

      Mans explained it so often he’s now ignoring the gov requests.

  • AJ 1 year ago

    Articles like this and from Garth Turner have convinced me that Canada is currently not structured for someone like myself – spent a lot of time in school, spent time serving in the military, and now making an honest living at a salaried job with a pension. I just can’t see a path forward here, financially, anymore. Now shopping my resume outside the country and already getting some interest. Looking forward to the day I can leave.

  • John frazer 1 year ago

    Prices are on a narrow edge, few sellers, few buyers. How long will this balancing act hold. A few more sellers or a rise in interest rate will upset the balance. US rates look like they are going up shortly, Canada will have to follow. There is a problem with the US dollar coming. Higher rates will be needed to stop its fall. If gold starts to move higher, its shows lack of confidence in the US dollar , higher rates will follow quickly.

  • Mike 1 year ago

    Why do you use debt and leverage interchangeably ?
    I have a $100,000 left on my mortgage in Toronto.
    My cousin has a $100,000 left on his mortgage in New Brunswick.
    We both have the same amount of debt.
    My house has a market value of $1.9 million, his has a market value of $500,000.
    Do we have the same amount of leverage?

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