Canadian Real Estate Fueled By Pre-Approvals, “Enormous” Shock Coming: BMO

Canadian real estate markets just experienced a shock, but another is on the way. BMO recently told investors they expect mortgage pre-approvals are propping up markets. Much of today’s home sales fail to reflect current mortgage rates, since many secured their interest costs months ago. The erosion in buying power will deliver another shock in the coming months, warned the bank.

Canadian Real Estate Mortgage Pre-Approvals & The Market

When a borrower applies for a mortgage, they obtain something called a pre-approval. These allow the borrower to secure a rate while they shop for a home. Typically this gives buyers 90 to 120 days of interest rate protection. It’s a lot more practical for buyers to not have their purchasing power fluctuate day to day.

It is odd for interest rates to climb this fast, making this a weird situation. Mortgage comparison site Ratehub data shows the average 5-year fixed was 3.59% back in June. That means these borrowers with a pre-approval have until October to buy at their secured rate. A borrower in this situation has a nearly 1 point discount and limited time to use it.

Canada’s Real Estate Buyers Are Still Motivated By Pre-Approvals

BMO argues this provides a sort of buying cliff, where sales are still motivated at lower rates. Buyers with pre-approvals debate if their interest costs will rise more than prices fall. Home prices are falling, but they might be falling even faster without pre-approvals. When there’s an expiration date on your mortgage, you may value speed of execution over value.

“At this precise moment, it’s a bit of a unique situation where many potential buyers have pre-approvals in hand from before the big wave of BoC tightening, while also looking at 10%-to-20% discounts on home prices,” explained Robert Kavcic, a senior economist at the bank. 

He adds, “If you can buy at a discount with a mortgage rate that no longer exists, it could be enticing.” 

An “Enormous” Shock Still Awaits Canadian Real Estate

Current buyers don’t fully reflect the impact of financing on liquidity. As a result, BMO told investors they expect a further shock, using Ontario to illustrate its point.

“… the bigger picture is that there is still an enormous interest rate shock to absorb. From an affordability perspective, the one-year increase in the carrying cost on an average home purchase in Ontario has only been rivaled in the late-1980s (and this incorporates already-lower prices),” explained Kavcic. 

That point might be crystal clear to the industry. However, he clarifies for the average person, “In other words, this is the sharpest tightening of housing conditions in a generation, and it will come with further adjustment…” 



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  • R 2 years ago

    …and all those pre-approvals are backed up by CMHC. What could possibly go wrong?

    • Tony 2 years ago

      Actually they are not, only if it’s a purchase with less than a 20% downpayment.

    • Deano 2 years ago

      I’m less concerned about defaults than I would have been in the US in 07. Canadian’s pay mortgages first and always, different culture than US. That being said, those fat car loans, CC payments, LofC payments, trips etc etc, will all suffer, deepening the coming recession (which could conceivably cross over into depression territory). Of course, what do I know, I’m just speculating, like we all are.

    • Jane 2 years ago

      What about the crazy valuation banks like BMO and other banks did to a property not worth it

  • Remington 2 years ago

    They’re planning on screwing everyone. What until the new construction takes a hit and starts to layoff so many.

    • Deano 2 years ago

      Help me understand who “they” are and why they want to screw everyone?

    • 2 years ago

      Can class action lawsuit be filed against BOC for screwing everyone over?

  • Ryan 2 years ago

    10-20%…. try 40 on for size

    • Wolfe 2 years ago

      agree….maybe more

    • Tony 2 years ago

      There are enough projects that are pre sold that it would take several years before that happened. It would also take no sales whatsoever in pre-construction, which actually is not the case right now. Projects are still releasing and depending on where it’s located, selling fairly quickly.

    • Cowboy 2 years ago

      It’s too late the damage is done to all the markets right across the Canadian Nation

  • Pies in the sky 2 years ago

    That’s just the beginning…new construction slows layoffs happen, home values shrinking less liquidity to do renovations and the chain reaction for all those involved in from refinancing to the actual construction add all the fly by night Real estate agents that popped up…now you have high cost of living less liquidity means less spending on nights out, new clothes and toys leads to more layoffs elsewhere which leads to more available workers looking for jobs bringing power back to employers to shrink wages….just a game of mouse trap everyone so focused on getting the cheese they didn’t see the trap being laid…surprise!!! lots just lost this game, and more to come

  • ian steele 2 years ago

    500,000 new immigrants to this country will have an impact on lower end real estate, but not units over 1.5 mil.

    • Deano 2 years ago

      New migrants have to rent first, very few can just buy outright. I worked for one of the Big 6 banks….saw this, most of the new buyers had been in Canada for a while.

    • Yoroshiku 2 years ago

      @ian: It’s not as if 500,000 are all going to buy homes. Some are joining family that’s already here. Some are kids. Many won’t be able to afford a home in places (like Toronto) where the jobs are.

      I do hope Canada will be welcoming well-qualified doctors & nurses. Seems like the healthcare system is hurtling toward major shortages in many areas.

  • Craig Ruttle 2 years ago

    Ian, 500,000 new immigrants can live in 1.2 million vacant homes coming online once their owners realize they have to work properties to avoid government penalties and make money on losing “investments”. Besides with jobs vanishing what kind of immigrants will flood into Canada to join bread lines: Doctors and Lawyers who are not allowed to practice and have to compete for jobs at McDonald’s?

    We have painted ourselves into a corner.

    • Not a realtor or heavily indebted 2 years ago

      Well established locals are priced out of the market.
      Where are the new comers from second and third world countries get the down payments and earnings to support bubble prices?

    • Scott 2 years ago

      Lots of people would like to live in those homes, I suspect there are not that many, and likely trying to sell them.
      There is not enough housing, people cant afford to buy so people doubling up and rents rising.
      With taxes, mortgage costs, maint, utilities etc etc going up its a dire situation.
      Those 400K people will come, free medical, $600 a month tax free for each kid, cheap university, OAS, welfare AND its a lot easier to get into the US living in Canada, than most other countries(ask Elon and many thousands of others)…. They might only use a friend for a mailing address and spend 8 months somewhere warmer, but its a fantastic deal for anyone coming, even if only to have a kid….

  • richard stanbridge 2 years ago

    the economists of the world have quietly been beavering away making new global laws regarding banking bankruptcy and who is going to bail them out this time. if anybody out there thinks that their money is going to be insured if this implodes like it did 13 years ago, they are dreaming. and of course the man in the middle of this quiet scam is none other than mark carney, past boc governor, boe governor, and of course goldman sachs.

    • Wolfe 2 years ago

      bang on….its going to get real ugly

    • SH 2 years ago

      …and future Prime Minister.

      Canadians are stupid enough to vote for him. And if they don’t, the Liberals and Bay Street will simply rig the vote.

  • Greedy 2 years ago

    I think it is time for people to stand up against this tyrannie. Why people should suffer from banks and gouvernement mistakes? All canadiens should unite against these banks and if needed, people should stop paying until they stop playing around with people. No institution is stronger than a united people of a nation. Stay united against the banks.

    • Ian 2 years ago

      This is an excellent example of why the BoC needs to pause longer before increasing/changing rates again. I never considered the impact of mortgage pre-approvals, but I can completely see and understand that being the last breath in the housing market before a broader slowdown finally takes affect. Raising rates again, before those pre-approvals expire or are used, would be foolish. Hopefully (but sadly doubtfully) the BoC “experts” see this too and wait a bit longer.

    • Rand Passmore 2 years ago

      Wow! In sleepy average times your comment would draw derision. But now people are growing angry at banks and the type of wealthy seen as greedy parasitic predators who take and take and have morals to rival the devil’s henchmen.

    • fonzy scam 2 years ago

      Why? they choose to put their investment in this fonzy scam country.
      Nobody forced to join this shit. They will be responsible for their decision.
      year 2023 will be the best for this fonzy scam country ever.

    • S H 2 years ago

      The past two years proved that too few are willing to stand up against tyranny.

    • Mick9 2 years ago

      Go ahead. Let us know how it goes.

    • Mike 2 years ago

      Immigration is one of the pillars of Canada’s economic growth. To maintain healthy economic growth and a steady influx of new immigrants to support population growth, Canada needs affordable housing. The government and the Bank of Canada are well aware of the impact of housing affordability on immigration rates, and on long-term economic growth. Whether you like it or not, BoC had to step in!

    • J 2 years ago

      great idea, how, where and who will start?

  • Rand Passmore 2 years ago

    You have a point.

  • Taylor 2 years ago

    I think we can all figure out the only think that can’t budge is monthly payments, and they have gone from 1.75% to about 5%.

    MonthlyPaymentOf($100k @ 1.75%) = MonthlyPaymentOf($70751.38 @ 5%)

    So Assuming interest rates don’t go up any further, housing prices should drop 29.25%. You can use any online mortgage calculator to understand exactly how much prices should drop.

  • Dave 2 years ago

    This story would have had a lot more credibility with some data. Like the % of homeowners taking fixed rate vs. variable. And the whole “as low as 3.69%” comment…. the yield curve is basically done nothing for 3 months when you’re looking at rates 2+ years into the future.

    The pre approvals I agree are a factor, but not as much as they’re making it out in this article.

    Even with an interest rate of 6%, inflation at 8%, it’s basically free money still and that’s helping to fuel the market more than pre approvals are.

  • Dan 2 years ago

    Not sure about this. Most mortgage holders have been taking variable rates so far in 2022.

    Also, it’s pretty rare for interest rates to be so far below the inflation rate AND have a housing market crash at the same time.

  • Derrick Marshall 2 years ago

    I remember almost 18 % Canadian interest rates occurred late 70s .. 3 years ago prices of construction materials doubled and tripled which means the price of new housing reflected that .. also the price of used housing always adjusts to the cost of new like everything else .. banks greed fueled by buyers ignorance and irresponsible borrowing will always be a problem .. the banks tighten borrowing rules .. the public whines .. the bank loosen borrowing rules the public cheers but then whines about rising housing costs ..

  • Dwayne Micheals 2 years ago

    The economy is a house for cards. The smallest breeze and it’s all over. Minimize exposure to debt, liquidate investments to cash and hold on tight. The banks are insulated due to their size and banking laws. Horrifically bad government policies and uncontrolled spending have contributed to inflation which gas on the fire. There will be nothing left!

  • Nathan 2 years ago

    Appreciate if there were links to the source of these comments from various bank economists/analysts. Same request for pretty much all of the articles you guys post.

    So I can read the source info and interpret the data myself.

    • Better Dwelling 2 years ago

      Hey Nathan, the comments usually come by email or paid services. Unfortunately there’s usually nothing to link.

  • Iron Man 2 years ago

    I still don’t understand why you removed my comment!

  • Average Working Canadian 2 years ago

    Really! Tyrannie? How about crazy buying and greedy sellers and expecting to get 10x profit on what you paid in a couple of years or less. The market will drop like crazy now and houses will sell for what they are worth. People will get what they deserve in this greedy market.

  • Mike 2 years ago

    Canada’s Real Estate Buyers Are Still Motivated By Pre-Approvals

  • Anonymous 2 years ago

    Let it drop!! let the interest rate rise! There is no doubt the recession is around the corner funny though that a lot of people have no clue what it means from an experience perspective. Not to worry, they will know soon! I am pretty sure that Fed will increase interest rate again and again. I don’t know how most of people are doing it, household debts are at 1.86, living paycheck to paycheck, no saving, spend, spend, spend, mortgage is increasing by the 100’s, everything is expensive, how are they keeping their million dollar homes? I guess some will make it and some won’t?

Comments are closed.