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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27 Comments

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  • Trevor 2 months ago

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

    • Yuzheng 2 months 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 2 months 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 2 months ago

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

    • D 2 months ago

      Trevor is dumb

    • SCE 2 months 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 2 months ago

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

  • Clown Patrol 2 months 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 2 months 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 2 months 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 2 months ago

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

  • Just_Being_Honest 2 months 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 2 months 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 2 months 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.

  • ken 2 months 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. 2 months 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 2 months 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

  • @xelan_gta 2 months 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.

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