Canada

IMF Warns That Canadian Real Estate Is A “Key Domestic Risk”

Canadian real estate prices are one of the biggest risks to the country, according to a big three letter organization. The International Monetary Fund (IMF), the global organization dedicated to sustainable growth, released a statement after an official “mission” to Canada. The organization cited real estate prices as a “key domestic risk.” Changing price expectations, mortgage rates, and unemployment were all cited as risks to home prices. The organization didn’t elaborate, so let’s take a quick look why these areas might be of concern.

A Sudden Shift In Price Expectations

Declining real estate prices are a possibility, despite what your real estate agent told you. According to the US Reserve Bank of Dallas, real home prices in Canada are down 5.72% from the second quarter of 2017. People haven’t been paying too much attention to it due to the fact that prices were up 4.45% from the previous year. However, price declines stall demand, which feeds lower prices.

Canadian Real Estate Prices

An weighted index of Canadian real estate prices, adjusted for inflation. Note the dramatic movement from 2003 in prices across the country, despite relative horizontal movement for decades prior.

Source: Federal Reserve Bank of Dallas, Better Dwelling.

Faster Than Expected Increase To Mortgage Rates

Faster than expected increases to mortgage rates were cited, but what’s expected? Ignoring the lack of qualification, rates are on the rise for the first time in quite a few years. The Bank of Canada’s average 5 year fixed rate is now 5.34%, up 15.08% compared to the same time last year. That hike by itself reduces the maximum mortgages that can be borrowed by just over 7%. Not to mention the impact to the wallet of the nearly 50% of homeowners expected to renew their mortgages this year. If you’re bullish on the Canadian economy, you’re bullish on rates rising.

Canadian 5 Year Fixed Mortgage Rates

The Bank of Canada’s 5 year fixed rate for mortgages is just off of record lows.

Source: Bank of Canada, Better Dwelling.

A Rise To Unemployment

Unemployment is near record lows, so it may not seem like a huge concern. However, if you know what “full employment” is, it’s not all that comforting. Full employment is the least unemployed people you can have in an economy, without the scarcity of unskilled  workers driving wages higher. Higher wages sound great, but at the phase of full-employment, it accelerates inflation. The acceleration of inflation has the counterintuitive effect of devaluing all wages. You make more, but you can buy less.

Full employment is generally considered below 6% in Canada, and we’re at 5.8%. It’s a number we haven’t seen since ____, when [outdated reference]. You should expect wages to pop, inflation to soar, and/or employment to jump higher. The move results in decreased profitability for businesses, often forcing them to look for “efficiencies.” Think McDonalds rolling out widespread automated ordering machines, when minimum wages increased. The impact to GDP is usually positive near term, but that doesn’t mean a lot if you’re unemployed, does it? The first signs of full employment have already hit Vancouver, where service gigs can’t be filled due to the income to housing discrepancy. Still having trouble picturing it? Imagine Nunavat style wages, prices, and employment, but in Toronto and Vancouver.

Canadian Unemployment Rate

The rate of unemployment across Canada, seasonally adjusted.

Source: Statistics Canada, Better Dwelling.

The IMF’s risk statements were vague, but a little digging shows the data supports it. The 3 factors are headwinds to keep an eye out for, and may impact real estate prices in the not so distant future. Hopefully government agencies across Canada are preparing for these risks, and not just blaming mother nature.

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18 Comments

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  • Bluetheimpala 4 months ago

    Tick tock. BD4L.

  • Dennis 4 months ago

    People are tapped out on debt and their asset valuations have stalled so they can no longer extract capital (HELOCs) cheaply 3-5% interest.
    Their new solution, alternative lending, via 2nd and 3rd mortgages at 6-12%.

    Meanwhile, in the GTA sales have regressed back to 2007-2008 levels, liquidity has left the market.
    Many people, or the 8% that Poloz speaks about are bleeding to death as the vultures circle. The problem is that they will bring down many more as they fall.

    All of this is happening without a recession which many anticipate in 2019 triggered by one the IMF’s risks.

    The new Ford Government will start slashing government jobs shortly to the tune of 4% of budget or $6 billion:
    At $100,000 per job that is: 60,000 jobs.
    At $60,000 per job that is : 100,000 jobs.

    Is that not what Hudak said: Cut 100,000 government jobs!
    All these people will instantly have to sell.

    • showerthoughts 4 months ago

      The Government of Ontario has 60,000 permanent workers total. On top of that there are tens of thousands of contract/temp workers, they will be cut swiftly. All of the Liberal backed projects will be cut… think gender identity, affordable housing, cap and trade.

      Ford BETTER NOT rescind the Foreign Buyer’s tax. I hope he leads us into a recession quicker than we think. Flippers and speculators go bankrupt. Then BAM house prices go back to 2009-10 levels.. People earning $40K a year can by a townhome in Waterdown or Oshawa

      • Dan Duran 3 months ago

        They can by a house but they still can’t spell. Why don’t you go back to school and get a better job instead of dreaming of economic hardship to others?

  • James Wolfe 4 months ago

    Ford said nothing during the election, no platform, no cutting, we will see what he does. I bet you, debt is higher by the time he leaves office…Tell us Ford, what previous liberal, ndp laws you will repeal. Tell how you will shrink the size of government. Tell us how you will pay down the debt, bring in property rights, repeal the expensive, phony bilingual (really meaning more government jobs for the french), multicultural policies, make English the official language of Ontario, support de-amalgamation, demand the equalization formula be changed, reduced…Unless you repeal laws, get rid of all sorts of expensive departments, reduce staffing levels…you cannot pay down, pay off debt, this is a fact… Until a party defines, essential and nonessential services, you cannot reduce debt and lower taxes…and you wonder why we will not vote for the so called conservative party??? Go look at a debt chart from the 1960s to today, straight up no matter which party was in power. SICK!!! What a joke you so called conservatives have become. Decades of massive government growth and in turn debt, and you cons have done the exact same thing.

    Decades of overspending…more and more debt, see what these people in government are doing to future generations? And they don’t care. Public sector parasites – baby boomers, that’s what they really are, scum, parasites.

    Greed, greed and more greed… this is what runs Canada now. All government, all greed…every day…while the private sector gets gutted…thanks greedy public sector unions, scum of the earth, all of them… This is just a fact and it’s only gotten worse.

    Solution? Only one. Things need to be cut, reduced and eliminated in all government, federal, provincial and local. Government is too big, intrusive, and they are accumulating too much debt, year after year after year. That’s right let’s get cutting non-essential services – expensive waste, bilingualism – (code for french), multiculturalism, phony rights departments…the charter, CBC, all this phony green nonsense, carbon taxes, cap and trade, equalization – (code for government money laundering into Quebec)… all sorts of big government BS. The future is at stake here and no one is willing to deal with this, how sad, how pathetic, all of you clowns in government and the mainstream media.

    “If a law is unjust, a man is not only right to disobey it; he is obligated to do so.”-Thomas Jefferson

    • Bluetheimpala 4 months ago

      (awkward silence as we side-look at each other and then back to James)
      Blue: Ahhh James, this is a RE blog, who are these ‘parasites’ and why aren’t you wearing any pants?
      James: Snarfle barfle…big government…grarfle larfle…greed…slash everything
      Blue: (backs away slowly and exits out the back)
      Oy Vey! BD4L.
      -Adrian

    • loraine james 4 months ago

      exactly. now we have a trump in Ontario. Yuck.

    • Andrew 4 months ago

      Oh fun another self-made libertarian. This is a RE Blog. Your ravings will largely be mocked and ridiculed here. Save it for Facebook or whatever

    • Irving Fischer 4 months ago

      It’s not all bad, The buck a beer thing sounds like a really good idea.

  • sumskillz 4 months ago

    I don’t see it in my day to day life. Folks are still doubling down on fancy cars & trucks, expensive leisure pursuit equipment, airplane vacations, major home upgrading projects everywhere I look. I’m not in a fancy neighbourhood either. The party is still in full swing even if homes are not selling as fast or for as much. If anything, the spending on home renovations is accelerating this year.

    • Lessdanadalla 4 months ago

      It’s called run it to the ground, typical herd mentality. These “folks” will be flushed in a first wave of foreclosures, I’ve seen it first hand down in States back in 2007-2008. I never figured out that crazy attraction between fools and granite countertops.

    • Jon Tario 4 months ago

      It is going to take a bit of time for these people to realize the par-tay is over. How many of them bought condos as investment property thinking the value would always go up? How many of them will see higher interest rates this year? How many of them will see the value of their homes decline? Denial is powerful. Once the pieces lock into place, they will be trapped. And these are the lucky ones who will be employed in the industries not impacted by a real estate crash, trade wars, and new government budget cuts. This wall take months or maybe even a year. Then they will default, others will panic sell, and a year later home prices will drop. Have your cash in hand if you plan to jump in. In the US you had to have 20% down payment to even get an application for a mortgage. Get ready. Start squirreling your money away now. Our time is coming to finally get a piece of the pie.
      #MillennialRising

    • Tommy 3 months ago

      Good. Let them spend and party. The harder they will crash along with any real estate “assets” they hold.

  • Glynis Van Steen 4 months ago

    Interesting article….I am asking for further clarification….are you saying that things could be getting dicey because our unemployment rate is currently just about equal to our full employment rate?

  • Bob 4 months ago

    Still not thinking in terms of global supply and demand?

    https://www.theglobeandmail.com/business/article-hudsons-bay-riocan-agree-to-sell-downtown-vancouver-store-for-around/

    The offshore buyer is happy to park nearly $700,000,000 in a single downtown Vancouver building. The same guy also happily owns at least 24 empty homes in Vancouver. Is the money being invested, or parked away from home government prying fingers? Our trade deficits turn in to real estate demand in Vancouver. The number of properties for sale here is dwarfed by offshore demand.

  • @xelan_gta 3 months ago

    Former head of US central Bank who led US through the 2008 crash is now predicting another US recession in 2020. He is not alone in his prediction.
    US recession is real, Canadian recession is even more real. All those are bad news for Canadian RE market. The next couple of years will be crucial.
    https://www.bloomberg.com/news/articles/2018-06-07/bernanke-says-u-s-economy-faces-wile-e-coyote-moment-in-2020

    Like Blue likes to say: Tick tock

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