Canadian Real Estate Is About To Experience A “Full-Scale Attack,” Warns Big Six Bank

Canadian real estate prices are approaching a mile-long stretch of hurdles. Easy credit conditions are being rapidly reversed, and then some, according to BMO Capital Markets. The bank warned clients of a laundry list of measures designed to cool the market, all hitting at once. They’ll have a limited impact compared to the big market measure of higher rates, but will temper exuberance.

“There is now a full-scale attack on Canadian home prices across various levels of policy. Here is what has shaped up recently,” wrote BMO senior economist Robert Kavcic. Let’s dive into what he’s talking about.

Mortgage Rates Are About To Surge To The Highest Rate In Years

Canadian real estate’s biggest hurdle is market forces. Since the Bank of Canada (BoC) acted late on inflation, they’ll need to use a lot more firepower to tame it. At the same time, the highest inflation in decades is driving 5-year Government of Canada (GoC) bonds higher. The combination will see both variable and 5-year fixed rate mortgages surge higher.  

“Mortgage rates continue to surge, with the BoC expected to accelerate its tightening pace with a pair of 50-bp moves,” said Kavcic. “Five-year fixed rates are already around 49, and variable rates should be well into 3% territory by early-summer. This market was feasting on low-1% rates through the pandemic. No longer.”

More Foreign Buyer Taxes and Higher Vacancy Taxes

Canadian real estate is also gearing up to tackle foreign buyers, a.k.a. “Non-resident” home buyers. Ontario hiked its non-resident tax to 20% and expanded it to the whole province. Previously the province’s tax was 15% and only applied in the Greater Golden Horseshoe. For our non-Ontario readers, that’s basically the economic area around Greater Toronto.

BMO also highlights Nova Scotia joining BC and Ontario in taxing non-residents. The non-resident buyer tax in Nova Scotia will only be 5% of the purchase price, much smaller than other taxes. However, they plan on adding an additional 2% annual tax on property owned by non-residents. Higher regular carrying costs tend to reduce profitability, or get passed onto households. It depends on other factors such as credit liquidity to determine how it reacts.

More To Come From Canada’s Federal Government In Weeks?

Then there are measures coming from Ottawa in the coming week. “… we’ll see what Ottawa has up its sleeve too, perhaps in the April 7th budget,” he says.

Ottawa is leaving Canadians guessing on policy movements, but the vacant home tax is almost all but done. Canada’s department of finance has been working on the details. So far there is debate on wide loopholes, but the tax is largely a psychological tax in the first place.

Breaking the speculative mindset with psychological cooling factors is important when tackling exuberance.

28 Comments

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  • Mark Howarth 8 months ago

    Where were these clowns 12 months ago. Why did they wait so long?

    • Hi 8 months ago

      They knew exactly what was coming and the narrative you see now is just part of the plan to talk down the market and inflation without actually doing anything meaningful and direct to drive it down and risk crashing the economy. They will flip flop on their narratives from month to month and many people have caught in to this and simply just ignore their rhetoric and make their decisions based on the data and the actual actions taken rather than the words said.

  • Ron Bruce 8 months ago

    Much to do about nothing. Bank 5-year mortgage rates in 1990 – 13.95% 1991 – 11.25%
    1992 – 9.63% 1993 – 8.85% Variable rates were even higher. 3% today still means I can play the casino game with Real Esate.

    Less than 1% is being paid by my Bank into my savings account, while unpaid credit card balances are over 19%. We have is a bank heist, except it’s in reverse – they’re robbing their customers—nothing new here, folks.

    • Alex 8 months ago

      In the 90s you didn’t have average wage earners walking around with $800,000 mortgages and retail investors leveraged 100% across multiple properties with real estate secured debt in the 7 figure range.

      • Jeff Graham 8 months ago

        I agree with Alex – if you have an $800K mortgage (the average house price now) and rates go up 2%, you’ll need to come up with an extra $16K to service the debt. This also creates downward pressure on the asset(s), so it’s particularly brutal if you’ve got a few highly leveraged properties. I think most savvy investors are going to be punting in 2022.

  • Ajoy Ghatak 8 months ago

    They need to remove tax break on principal residence. Simple. They also need to close loopholes like bare-trust loophole.

    • Patiently Waiting 8 months ago

      I don’t think the issue is principle residences. We at least have this over the Americans. The issue is using ones HELCO for a down payment on an investment home which technically is a 100% finance. Banks have stated this as an issue. Further, writing off the carrying costs for this investment. Homes should not be included as investments as they are shelter. You want to own multiple homes, you should have the money for the down payment and have the income to support the mortgage payments. It’s time the government starts encouraging more productive areas of investment to drive the economy forward. This dependence on real estate appreciation will eventually collapse.

  • Chris 8 months ago

    The other fun piece is mortgage pre-qualifications. I ran a mortgage pre-qualifier with my bank yesterday and was only approved for about 70% of the mortgage amount I would have been 6 months ago, even though our family income has increased over that time. Hard to spend millions on homes if the banks don’t let you. Fun times ahead as people stopped looking at historically low interest rates as a temporary thing. I remember when I bought my first property in 2002, the interest rate was 4.5%, and the bank told me I’d never see rates that low again lol. I feel like that rate would crush a lot of households these days.

  • Phong Duo 8 months ago

    Why are they attacking Canada’s economic miracle?

    Canada is a global housing superpower and must remain one!

  • Retired. 8 months ago

    Thank you for talking to Canada’s Parliament. You have a lot of initiative to do that.
    Your data compilation and analysis is very thorough.
    You try to show us the whole picture, not just a slice.

    You try to show and to teach us… more than what “main stream media” shows us.

  • Julian 8 months ago

    Just more sensationized journals to generate clicks. The ‘Full scale attack’ consists of higher mortgage rates, an expanded foreign buyers tax, and yet to be defined measures from the federal government? Sounds like standard click bate journalism to me.

    • Bunster 8 months ago

      Yes, what a joke. We are supposed to believe the same perpetrators that caused this housing mess are now screaming ‘we warned you!’ at the top of this over valued bubble.

      Meanwhile, going back to the Greenspan years….’ I see no bubble, therefore there is no bubble’ till that one popped in 2007.

      Make no mistake, all this is called usery. The banksters are the equivalent to the monarchs and their political tools and the population reduced to debt serfs. All these trillions of dollars flowing into the pockets of the very few aka 1%.

  • Patrick 8 months ago

    In 1989 you did… I remember a bank discovering they were 7th mortgagee on a property!

  • Murray Eddy 8 months ago

    Brain dead banks. Been dropping interest rates for 40 years to encourage people to borrow and spend to increase their profits. Now we bad the lowest rates in 5000 years and they kept them there for 13 years. Rewarding borrowers and spenders and slaughtering savers. The economy grows on earnings and savings not dead. Absolutely brain dead. Watch gor many bankruptcies and foreclosures.

  • Murray Eddy 8 months ago

    Debt not dead.

  • Eric 8 months ago

    Basic concept:

    The governmentwould not intentionally boost real estae prices during COVID only to pull the rug out right after. IF mortgage rates did climb past 3% (variable) you will see the BofC buying mortgage backed securities again in the name of “financial stability”. Canada went all-in on real estate during COVID. It was a policy decision. It isn’t going to just reverse.

    • AC 8 months ago

      Except when the BoC and government went all in on real estate, central banks had 0 concern that inflation was going to be an issue.

      The BoC reversing contractionary policy now would essentially destroy its credibility, leading to a rapid CAD depreciation which would only serve to further inflation and likely recession. I don’t think people can truly appreciate how caught between a rock and a hard place the BoC is currently.

    • John Bunting 8 months ago

      The real estate prices are not going to go down. On the contrary the prices will go up. People have sold their grocery stores, restaurants, salons to invest in Condo apartments in the GTA closing in 2023 and 2024 with an intention of selling the Assignment. Builders these days are offering free assignment clause.

      Major thing about the Real Estate is since last 4 years just before Justin Trudeau became the PM, he was supported by the Builders for the election. He has paid them back in the last 4 years. We all know he is F—- all PM. Believe me he is winning the next elections. The Builders are his strong supporters. I was working with a reputed builder for over 10 years before starting my renovation company. Not to forget the corrupt NDP supporting him.

      • Trader Jim 8 months ago

        This is the most bubbly thing I’ve seen. You can see that people are lowering the economic activity by disposing of their businesses to speculate on further housing, but the perspective is too deeply wrapped in the narrative of higher home prices that you can’t realize it’s a problem when an economy trades output for non-productive assets.

  • Rick Dufraine 8 months ago

    How about making foreign ownership illegal like most other countries. You can’t own land in many countries unless you have Citizenship. It seems to work for them why are we so eager to sell our property and resources? If you can’t buy land in their country why should they have that option here.

  • Steven 8 months ago

    Jeff, your math is off a bit. An 800k mortgage (25yr) than goes up 2% from 2.2 to 4.2 sees an increase of $10k not 16k.

    “Savvy* investors as you call them stopped buying a few years ago and have huge equity gains, more than enough to ride out a 25% correction. If your property has sufficient cash flow you don’t when the masses are whipoed up into a hysteria of fear.

    The BOC and Fed tightening program won’t be as deep or a protracted as many experts predict. There’s a recession beginning within 12 months and central banks won’t have the need to tighten to the extremes predicted.

    We won’t see the 50-60% correction that many people have hoped for although certain markets will indeed be hit hard.

  • peace 8 months ago

    The bank of Canada cannot increase the rates as it will cause recession in the economy . The rate cannot go more than 3% , as what happened in the past? how many can afford to pay more than 3% interest

  • cto 8 months ago

    aslo, dont forget, the US Fed controls rates, not the BoC…they just follow.
    if the FED raises rates to 5% , BoC will have to raise to 4.5% or Canada gets hyper inflation.
    The US Fed couldnt give a damb about over indebted canadians….
    Americans have much better balance sheets so they can withstand higher rates….oh well,…too bad for Canadians.

  • Nik 8 months ago

    Its too big to fail at this point. Mortgage holders, lenders, sub-lenders are leveraged to the max. Capital gains tax on primary residence by the libs? Political suicide, or virtue signalling to those who cannot afford a home?

  • Terry 8 months ago

    What they are doing isn’t going to change anything. Money launderers will continue as usual. They need to get the realtors off the bandwagon by lowering the percentage they can charge for commisions. Like California did long ago.

  • Hi 8 months ago

    Most Canadians will let all other debt default before defaulting on their mortgage. I think we’re going to see flat to very slow growth in housing for the next decade. Inflation make outpace housing appreciation and in effect make housing prices seem cheaper without actually crashing the market.

  • John Bunting 8 months ago

    Is the Government really serious in this. I think NOOOOOOOO.

    Reason, 99.9999999% of people are faking documents to get their mortgage in connivance with the Banks/Mortgage Agents and Real Estate Agents. CHMC is fully aware of this. Every mortgage agent in the Bank is paid $5,000 – $10,000 CASH for processing mortgage approvals.

    It is a known fact. I have reported this to many new agencies including the CHMC but it has gone unnoticed. The newspapers moderated my comment. You may do the same. Every person has a vested interest. It is all about Narratives.

  • Patrick T 8 months ago

    Too bad all these measures are coming about 45 years too late. Speculation and property flipping were just starting to get out of hand in the late 1970s. Measures like these would have prevented a great deal of inflation. I envy my parents’ generation for being able to afford a house on a single income. For a large percentage of Canadians now, home ownership is just a fantasy.

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