Canada

Canada’s National Housing Agency Is Forecasting An 11% Drop In Buying Power

Canada’s national housing agency sees a much smaller mortgage in your future. Canada Mortgage and Housing Corporation (CMHC) forecast numbers included projections for mortgage rates. The high projection for the rates almost add a fifth to the cost of servicing a mortgage. If rates hit these projections, buyers would lose up to 11% of their max mortgage size over the next two years.

What Are We Looking At Today?

Today we’ll be looking at the CMHC mortgage rate projections, and the impact they’ll have on a household. The Crown Corp used a 5 year fixed terms, and we’ll be running them against a 30 year amortization. We won’t be stress testing, because you can dodge a stress test at a credit union. Instead we’re looking at the pure impact of rates, on households earning the same amount over 3 years.

The 5 Year Mortgage Rate Is Forecasted To Rise Nearly 22%

The CMHC is forecasting mortgage rates will rise, consistent with interest rates “normalizing.” Analysts have a high forecast of 5.6% in 2018, 6.2% in 2019, and 6.5% in 2020. Currently, the 5 year posted BoC rate is only 5.34%, meaning a huge reduction in buying power is coming. The numbers seem small, but the 21.72% increase in rates from today to 2020 will have a serious impact on buying power.

Canadian 5 Year Fixed Mortgage Rates

The historic posted rates for 5 year fixed mortgages, and the CMHC high forecast.

Source: CMHC, Bank of Canada, Better Dwelling.

Canadian Real Estate Buying Power Can Be Reduced Up To 11%

Buyers in 2020 will be paying a lot more interest, reducing the size of principal that can be borrowed. If rates hit their forecast, the max mortgage for a household in 2019 would be 8.7% lower than one earning the same today. By 2020, it would be 11.69% lower than a household making the same today. The increase in rates show a big potential loss in buying power.

The impact of the rate increase skews to markets with a high debt to income ratios. Markets like Toronto and Vancouver, have very high home prices for the incomes. The result would be reduced liquidity. Cities like Ottawa and Calgary have very high incomes and relatively cheap housing. These markets are more likely to take the hikes in stride.

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38 Comments

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  • Trevor 1 week ago

    Look at that historic rate chart, we’re barely up from lows, and people are freaking out. SMH

    • Yuzheng 1 week ago

      Buying at 2015 rates was basically free money. You could get a variable just a few bps above inflation. That was a no risk play. Today, you’re hoping that the price of a home rises more than the cost of servicing debt on it. That’s pretty hard at 6%, considering only Toronto condos have been able to do that, and only very recently.

      • Vnm 1 week ago

        Sounds similar to the Bell and Rogers thing, you get a deal on the internet/phone/tv package for the first few monthsto suck you in, and then the monthly bills start going up. Once the initial term is up, you threaten to cancel, and they give you incentives to stay with them, some people cancel, but most people go for it.
        The difference with housing is that the contract is much longer, more costly, and you lose everything if you are forced to cancel.
        And they treat like a criminal, sentenced to 25-to-life for buying a house.

    • SUMSKILLZ 1 week ago

      “freaking out”…yup that’s the sentiment at the dog park these days.

    • D 1 week ago

      Trevor is dumb

    • SCE 1 week ago

      But lazy millennials here who complain about high prices just want a free ride. Stop eating $10 avocados toasts. Get a real job and save for a house like the people before you. If not, just rent… don’t care…. line my pockets!

  • Ismael Hines 1 week ago

    Bet they didn’t account for the change to low cost funding sources, like the cap on covered bonds approaching.

  • Clown Patrol 1 week ago

    Same clowns that said there was no foreign buyers in Vancouver? I’m sure they said this reduction in buying power would also stimulate sales, and lead to higher prices. 😂

  • neo 1 week ago

    Look at the forecast. Nice slow slope. That never happens. At the peak of this credit tightening cycle we should be getting back to 7% at least and get there by the end of 2019. It was 7.54% in 2007. By 2020 they will be lowering it again as he head into a recession.

    • Ian 1 week ago

      It also makes a pretty weird break to the right for 2020, and isn’t consistent with the rest of the slope. Unless they’re implying that a recession hits in 2020 reducing targets, it doesn’t look like it makes sense.

      • Brad 1 week ago

        There is a general consensus in the financial community that 2020-2021 will see a global economic recession

  • Just_Being_Honest 1 week ago

    What people fail to realize is, the government, big banks or anyone else can do nothing to stop this from happening. All the government is doing at this time is stalling for time. Looking at bubbles of the past, there has never been a soft landing, they always burst. At the end of the day, the good people of Canada are heavy in debt with interest rate only to rise. It’s not hard to understand, mathematically if you make under 300k you should not purchase a home for a million dollars. We are too far gone at this point. The Canadian government should have let the market crash in 2008.

    • Mauricio 1 week ago

      That’s the thing, it wasn’t going to crash in 2008. Most of the moves were designed to help the banks manage risk in the US, and help them free up more capital. Cities like Toronto were actually below the 1990 peak when inflation adjusted. They just transferred the debt risk banks had on to consumers as quickly as possible.

      When a bank fails, its bad government. When households fail, they should have been more frugal.

  • @xelan_gta 1 week ago

    This is a great article.
    Not only purchasing power is reducing but also regulators are forcing everyone to borrow responsibly which is cutting purchasing power even more.

    If you have high TDS ratio and HELOC you may be interested in reading this:
    https://www.ratespy.com/got-a-heloc-your-mortgage-options-are-about-to-shrink-11067208

    Private lending is next on the list.
    People with high LTV (loan-to-value) or TDS (total debt service ratio) should not be in the market at all – that’s the message regulators are sending. Their options to survive any shock are disappearing fast.

    Borrow responsibly, appreciation party is over for now.

  • Lol 1 week ago

    When prices slowdown, investors start expecting more fundamental and positive cashflow.
    House owners are already pretty unhappy with ROI for last 1.5 years and you would not expect them to grow rental portfolio. The last missing piece of the puzzle are condos. Once condo market slows down, the entire new rental supply will be on pause for good in Gta.
    And that rental collapse won’t go anywhere until rental prices are up another 50%. Nobody will be interested in creating rentals for you.

    • Grizzly Gus 1 week ago

      If prices go down and rents go up, then yes NEW investors can expect better positive cash flow………………… that does nothing for existing investors that bought at peak, many of which who bought pre con in last couple years did so prior to B20 or any rate rises. Their debts are their debts (if they can close), and the cost of that debt is a lot higher than they anticipated.

      Agree that condos are the last missing piece to the puzzle, once they go down, then there goes your price floor and the liquidity for the entire market.

      Market will be tough for renters for another 2 years or so, terrible for debt slaves for the next 5-7 years but will soon be great for the vultures.

      • Lol 1 week ago

        You bears are transforming each single discussion into “prices go down”. It is not a requirement. Prices may be stable, may correct, may grow beliw average histiric pace because of rate hikes and stress tests. It does not matter much.
        Current situatiin of each single landlird is not as important as overall transformation of ROI expectations for investors. So far investors were pretty loyal to rent increases below resale price increases because appreciation covers all struggling. Ince that understanding comes to them that aporeciation expectatiins should be decreased, rent growth expectations will skyrocket…for everyone, for those who are underwater/overstreched and for those in good shape. Rate hikes hurt caprates for all of them.
        It is very naive to think that the problem will be resolved by resale price decrease. Those guys that own are not born yesterday and now they are stress tested as never. Unsatisfaction and desperation is not the same. But renters wil take entire hit from caprate expectations and there is nowhere to go for them.
        The only thing that can change it is responsible deregulation of rental market by Ford, but I don’t see it happening so far.

        • @xelan_gta 1 week ago

          The problem not only can be resolved by price decreases, but it will definitely be resolved by that.
          Not sure what picture of a RE landlord you are painting but private landlords dominance is not a normal thing, it’s an ugly reality we are having.
          But as soon as land prices will go down and private landlords flee the market – it will be a golden time for PBRs. You may be surprised how many condo developments will be converted to PBRs as soon as pre-construction condo sales tank.

          Renters will be just fine. Private landlords – not so much.

          • Lol 1 week ago

            And why would property management companies want to acquire condo buildings? Are they special? Cap rate is something they don’t need?
            I don’t see clear picture in your head. You likely don’t understand how prop management companies work. Same thing as small landlords just less irrationality. All existing prop management companies already maxed out their financing capacity. They cannot acquire anything new until rent rises a lot. And even when it rises they still can’t because rent control delays their ability to finance for years or decades.
            For sure, bears always expect some abstract good guy to arrive on a white horse and save the day. The cruel reality is that nobody is saving renters. Resale prices went become affordable and today rental prices will look ridiculously cheap very soon. No escape.

          • Lol 1 week ago

            Xelan, you are like living in a pink dream, pretending that damage from Wynne did not exist. I remind you, Wynne canceled rent control exemption for units built after 1990. Before PBRs could somehow justify some volumes of new constructions because appreciation was high and rent controlled is not appliable. Now they have no capacity for financing and no justification because rent control is enforced.
            The only case when PBRs still do build new housing is under affordable housing program, which is a simple bribery to prop mgmt using your taxes. And there is no enough taxes to make any significant impact using that program. If government could finance all new housing using taxes, it would have done it already.
            Therefore, no help is coming from PBRs. Most of them used their appreciation increase in 2017 to start last projects. And even those projects included overly optimistic rate hike environment and appreciation expectations.

          • Foxxy 1 week ago

            @Lol what’s the difference between a condo building and an apartment building? As far as I can tell its one your own vs. one you rent, so why wouldn’t a property management company buy one if it could?
            Also, I find it very hard to believe that ALL existing property management companies in the whole world have maxed out their financial capacity.

          • Vnm 1 week ago

            As ever, the voice of reason Mr. X
            “Prices can’t go down”, they say that all the way down, just
            as they are now hallucinating that “prices will go up forever”
            The $300,000/yr to buy an average 4 bedroom home mentioned above, that’s actually the case for an average 4-bedroom detached.
            You would think that in RE sales you’d need at least a basic grasp of basic arithmetic, but apparently not.

          • Lol 1 week ago

            Foxxy, you may learn a definition of caprate. What we were talking about is that rent paychecks should cover mortgage, maintenance, taxes and perfectly leave some extra money in the pocket each month.
            It is a basic fundamental and each landlord would better follow that guidance. The only case when landlords don’t use it, when average appreciation is much higher than in other areas and its not so important what cashflow is.
            Property management companies are pretty much same as small landlords, they also look for caprate, otherwise investment is not justified.
            We can simplify this discussion to very primitive terms:
            1)I say, socialist government removed all incentives for investors/landlords to invest. Rate hikes and lowering appreciation expectations will make it totally unattractive for any person/company to start new rental business.
            2)My opponents say that property management companies is a very “special” type of landlord & investor that for some mysterious reason would be willing to start unprofitable business when everyone else is not interested.
            3)To make it even funnier, I highlighted the weakest point in this chain – current rental price that is too low and totally unsustainable to keep existing rental supply on the market. My opponents are funny enough to say that resale housing price stability is more vulnerable than rental price and would fall much earlier. It did not fall with detached houses, why would it fall with condos? Landlords will lose interest to create more supply, true, but they will be very far from a desperation point with panic selling. Rate hikes are manageable for them, rent increases that we need to see to make supply creation attractive is not manageable at all and it will be very sad to see how renters are struggling.

          • Lol 1 week ago

            You guys just can’t make life of landlords harder and harder and still expect that there is some mysterious entity exists that will be interested in creating supply for you, when everyone else is not.
            Landlord is landlord, does not matter what category it belongs to. You fight with landlords, they find it unattractive to grow businesses. And even existing rental units slowly acquired by first time buyers and disappear from rental market.
            That’s all you can reach by fighting with landlords.
            If you want to see rental market pricing picture less cloudy and stormy, start thinking how to attract landlords, its that simple.

          • Grizzly Gus 1 week ago

            So now that it is so hard for landlords because of the rules, why would the recent ones who paid record prices and are cash flow negative hold onto their investment if prices start to drop. You have no logic…….lol

            WHEN prices drop, true investors will step into the market and buy the liquidated assets on the cheap at better cap rates, perhaps if a situation emerges where a REIT or similar institution would step in and buy the building to convert it to a PBR.

          • Lol 1 week ago

            Grizzly, there is no better caprate coming from “liquidated assets”, nobody is liquidating, it is simply your hope.
            Better caprate can come mostly from rent increases. But to achieve the point where caprate is attractive, rents should from 30-50% from today values. Include “neutral BoC rate plan” and you will add few more point to rent increases. Without achieving that market rent levels, nobody is stepping in.

            Your problem is your socialistic mind that wants to steal and reposes. Socialists only know how to do that. Steal from rich, spread among poor and viola, a recipe for paradise. But Toronto learned how to deal with socialists long time ago. Stealing and repossessing does not work. What the city actually needs to keep rental market alive is not stealing, but creating new value (new developments). And here socialists are totally helpless. They know only how to fight with landlords and know nothing about incentives to motivate them to invest and provide useful rental services for Canadians. Only capitalists know how to do that.
            Trying to justify your socialistic ideas, you create the whole bunch of absurd ideas, like blaming foreigners in taking your properties (when they actually created new housing), then removing rent control exemptions…Now you are at a stage where you put a magical meaning to a large landlord like REIT. Like REIT is somehow different from small landlords. The only reason why small landlords look evil and REIT looks like a savior for you is your hope. A hope to steal something and reposes. You can’t steal from REITs a PBR building, but you have a dream of doing the same from a small landlord, lol.

          • Lol 1 week ago

            Grizzly, your first step to understand at least something can come from admitting that landlords are useful people that provide valuable services to population.
            Usually this step is very hard to make for socialists that want them bankrupt and robbed. Once you pass this point, you will start discovering even smarter stuff, lol.

          • Lol 1 week ago

            Even in perfect dream of naive socialists, where magical REITs are willing to create PBRs, resale market is not providing more bed to population… what you need is:
            -Dramatically decrease construction costs
            -Land values
            -Cost of permits
            -How about steel price that have grown because of tariffs?

            You’d better bet that each construction worker would start receiving 50% of his current wage, otherwise I don’t see how your magical REITs can build new housing for a “liquidation price” that you dream of.

            Sorry for my rudeness, but doesn’t sound very realistic to me, ahahaha.

        • starboy 1 week ago

          LOL is 100% correct. I am a landlord that owns 5 properties. LOL is describing exactly how a landlord thinks and acts in this environment. You should appreciate that he is giving good insight into how we think about investments in RE. All these losers trying to socialize housing which will only cause rental units to dry-up and rental prices to skyrocket. LOL you are arguing with 2 of the biggest bums on this site: Xelan and Grizz who are both renters who sold their 200 square foot condos and then trying to re-enter. They are the type of guys that get top 1% education to make top 30% money.

        • MM 1 week ago

          If you have to “slave” to pay for rent at crazy price…. why would you live in Canada? People come, realize the b…t of it all, make a quick buck and go back home with money. Not that many people care for the free healthcare which is free in many countries in the world anyway.

  • ken 1 week ago

    Umm, something wrong with that chart Better Dwelling. Shows rates bottoming at around 4.64%

    Well, banks were handing out 5 year fixed mortgages at 2.2% and even now you can find low 3%, so, might want to make some adjustments to that chart.

    • Beh G. 1 week ago

      These are “posted” rates. Bank typically give a 2ish% discount on their posted rates to good clients (i.e. people with good credit), although the exact rate of that discount has varied a bit over the years.

  • saywhat 1 week ago

    Dear Lol,

    You stated:

    “Foxxy, you may learn a definition of caprate. What we were talking about is that rent paychecks should cover mortgage, maintenance, taxes and perfectly leave some extra money in the pocket each month.
    It is a basic fundamental and each landlord would better follow that guidance. ”

    Slow down bubba, what Foxxy is saying is exactly that, I will simplify that fuck out of it for you:

    You are right! Landlords can not operate a profitable venture unless they cover everything and have excess at the end!

    But renters can’t and won’t pay more money then they have.
    As prices drop to fuck in line with interest rate rises to over 6% stressed tested at 8% properties will become A LOT CHEAPER and the people who bought unable to carry much profit on a rental will become SCREWED (peak buyers) because they won’t be able to get the rent they need because some newbie landlord who picked up your unit for 35% less than you paid will be offering it for a profit to himself not giving a fuck how much you or other likes need to spin a profit.

    What renter is going to rent your unit for 20K a month on a salary after tax of 4K a month when the newbie who bought at crash prices is renting it for $1,800 a month just because that is how much you neeeeeeeeeeeeeeeeeeeeeeeeeeed to turn a profit now that rates have risen and you are backwards on the mortgage and can’t sell it for the 800K you paid for it?

    In conclusions, you also have rising maintenance fees and are taxed on your profits against your net.

    NO ONE CARES how much a dude who bought high needs to make to save his ass in rent.

    But hell, I could wrong, perhaps household with 5K combined after taxes will run at you like bats to pay you $8500 a month in rent instead of buying and paying less mortgage or renting from the cheaper dude.

    You do you babe, go buy more condos, this shit is going up for infinity! You win. #makessene

    • Lol 1 week ago

      Saywhat,
      It a commonly used mistake by bears-renters.
      I can say same, nobody cares if you can afford rent. If we have 10 units available on market and 1000 applicant, your income is irrelevant if you are #355 in the line.

      The whole idea of rent control and tightening was to hope that someday there will be a moment in history when renters no longer can afford to rent. If it happens, landlords start providing “free services”. But time goes on and this moment never comes.
      Instead, people like you change large 3bedroom apartments for a shared room with 5 people on bunk bed. You have no idea how much more landlords can densify your living conditions and you still will be paying the maximum price you can afford.

      If you cannot afford to rent, ask government why it created such environment, don’t ask landlord to pay for you, believe me, they won’t. Unless someone else is paying them, like massive appreciation.

      • saywhat 6 days ago

        LOL

        I don’t rent. But I do count, and can think. I can not imagine a functioning society where two income 300K plus family with maybe a kid or two will run to pay you 50% more in rent then they do today to rent a house (about 8K rent) when they are only clearing 10.5K a month and when at that point they can just go buy a bubble burst detached and pay only 4-5K in mortgage? Is the reason that they will all line up in the 1000s to do this that you need to meet your caprate? This would be a 300K family btw…will they stay in Ontario and live in bunk beds to help you make the 50% more rent you need? What about the 200K families, the 100K, the average ontario median of 68K will they all pay you 5K a month to live in a cage? OF COURSE THEY WILL. It makes sense, because you need them to. Go buy more property to rent…do it fast!

      • saywhat 6 days ago

        another side musing, can you all imagine how incredible Canada would look on a world stage and how “DESIRABLE” it would be if it fell into a state where a doctor married to a teacher could only afford to live in bunk beds in a closet sized room for 8K a month with their two kids. Why in the ever living fuck would they bother to live in Ontario where their skill sets if that was the scenario?

        I have nothing against renters, I was one before I bought in 2012 (I rented from 2008-2012) while I was finishing my degrees and before I got married. I got my house in the burbs for 412K in 2012 at peak it hit just over 920K and now it is back sitting around 840K.

        But if I had to rent bunk beds for 8K a month…I would have just left Ontario, my degree is transferable and the phenom of online employment has been in steady growth and will grow more making where you live less relevant and allowing millennials and older millenials (of which I think I may be 36yrs old) able to chase affordability in terms of living local. My husband has been thinking of transferring to the Ottawa leg of his company, and my teaching degree works pretty sweet in Ottawa as well. So if LOLs dream of making billions to sandwich people into bunk beds in the units he was clever enough to buy at peak and for some reason it doesn’t occur to anyone that they could just buy newly slashed bubble burst properties and pay less than LOLs rent they could always just take their combined gross pretax 230K families somewhere else? Or is that wrong? they have to line up to pay 8K to rent a bed? If shit doesn’t improve here lots of people will move. Sorry to say LOL but you can’t force them to stay here and pay peak prices from 5 years plus ago at a 30% year over year appreciation (that you clearly NEED) to unload your properties at a magic profit to when the dude next door is selling the same unit at a 15-40% discount. Nor will they stick around and pay you 8K a month for bunkbeds when the dude across the street is renting a 2 bedroom unit for like $1,800 a month. But fuck man 8K for bunk beds for the top 1% of income earners will for sure create a society that whole world envies and can’t wait to live in!! BUY MORE PROPERTIES TOMORROW. Fuck you want a cute detached in the burbs I can give you a deal, only 1.4 for you, but you need to buy tomorrow! Just charge your renters 30K a month in rent, 10 different families line up for that and then I can find you bunk beds on the cheap!

  • @xelan_gta 1 week ago

    Lol, I’m not a fan of rent control but it’s not the end of the world, there is a rent turnover and you are completely off on this one:
    ” remind you, Wynne canceled rent control exemption for units built after 1990. Before PBRs could somehow justify some volumes of new constructions because appreciation was high and rent controlled is not appliable. Now they have no capacity for financing and no justification because rent control is enforced.”

    Here is why:
    “New purpose-built rental construction surged in Q2, with 2,635 starts recorded during the quarter, raising the total inventory under construction to 11,073 units — the highest in at least 30 years
    The number of planned rentals also grew, reaching a total of 120 projects and 37,403 units”
    “The inventory of rentals underway is now higher than the total number of units built since 2005 (10,871).”

    https://www.urbanation.ca/news/226-rapid-rent-growth-continues-while-construction-reaches-30-year-high

    There is a ton of supply coming both in condo and PBR sectors. Private landlords better to track those stats.

    • Lol 1 week ago

      Xelan, denial is a bad answer.
      I truly believe deep inside you already agree with me that nobody is interested today to create new rental units and it will enviable crystallize into real numbers.

      If we dig deep into details:
      1)I don’t like Urbanation much. They consistently report rent increases 6-9% for last years. Even if we skip Padmapper’s reports with 15% and TREB reports with 11%, it is kinda easy to have some concerns about Urbanation data quality. CMHC also report ridiculously low rental prices and then it turns out they just use them to calculate Average Market Rent(AMR) for affordable housing, which means the reported price is 100% manipulated.

      2)Despite my relationship with Urbanation, I do believe they are right at some extent and we have pretty good number of projects under construction for PBRs this year. But is it really because landlording became more attractive last year? Seriously?
      Of cause, it is caused mostly by appreciation gains in early 2017 and partial rent increases caused by turnover of tenants. Both factors allowed prop mgmt companies to leverage more, and considering what happened in 2017, many of them are likely underwater a bit, but it does not matter for long term plans. What I am saying here, it should not surprise you that we see bug number of projects that were started and financed last year and its not because landlording became more attractive.

      3)Don’t exclude here the “Affordable housing program” as a reason for some PBR numbers. The funding for that program skyrocketed in 2016-2017. But in fact, they used your taxes in least efficient way. PBRs took an obligation to have at least 20% of rental units below CMHC’s AMR(see above) for 25 years and for this, government subsidized the construction. Another way how PBRs were enforced is by “inclusionary zoning” program. It forces developers to assign several percents of new units to affordable or social housing and keep low rent below AMR. Guess what happens with cost to build an average unit for sale after such measure is enforced.

      4)Overall, what I am saying at the beginning of this discussion has not yet happened. It is forecast mostly. Because condo prices are still growing double digits second year and both resale and preconstruction condo investors are pretty optimistic. So we do have people that are still willing to create new rental housing today. Yet. My doom & gloom forecast was mostly focused on the scenario of cooling YOY gains of condos. So far only houseowners are in this situation of low YOY gains and they can kinda “see the future”. What happened with house price gains affected rental market of room rentals hard way, but not full units yet.

      5)Preconstructions is a bad investment anyway since 2017. I keep repeating it everywhere. Builder cannot decrease cost to build much, profit margins are tight, but the precon prices are 20-30% higher than resale market. Only very very irrational people do invest today in preconstructions. Most of them are still lucky because condo YOY gains are still good, but its unsustainable. Better to completely avoid preconstruction market today from investor’s perspective. Add here risks of cancellations like COSMOS condos and cancelled rent control exemption, and precon units smell really really bad.

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