Most of Canada’s Peak Home Buyers With A Minimum Downpayment Are Underwater

The Canadian real estate bubble is bursting rapidly as rates rise, and peak buyers are in for a rough time. Canadian Real Estate Association (CREA) data shows the national market peaked in March 2022. We ran the numbers to see how much equity buyers from that month would have at this point. Most peak buyers of a typical home would be underwater as of last month.

Underwater Mortgages, and Loan To Value Ratios

Mortgages are underwater when the loan to value (LTV) ratio is 100% or greater. In plain english? The value of the home is insufficient to cover the loan in the event of default. Lenders are in a tricky situation here, since they have nothing backing their loan. Generally, Canadian mortgage borrowers have substantial equity, resulting in relatively low LTV ratios.

Underwater homeowners need to pay to sell their home. They still owe the remainder of the loan, regardless of what the home securing the loan is worth. Borrowers need to top up whatever is missing to cover the shortfall. That doesn’t include the additional selling costs, like Realtor commissions, legal, moving, etc.

Today we’re looking at which markets would be underwater for first-time peak buyers. We’re using the national peak of March 2022—right before interest rates began rising. We’re using the minimum downpayment, and high ratio mortgages for the most part. Markets with a typical home over $1 million require 20% down, which is a conventional mortgage. This gives lenders (and borrowers) more cushion in a downturn.

A Typical Peak Buyer of Canadian Real Estate Is Nearly 10% Underwater

The price of a composite benchmark home has taken a sharp drop since peaking this past March. A typical home fell to $735,400 in October, down 15.3% (-$132,900) from peak. A buyer that left the minimum down payment would be 9.7% ($71,100) underwater had they bought at peak. They would have to pay more than they put as a downpayment to exit that contract.

Most Canadian real estate markets (55%) are in the same situation, looking at the major indexes. If October’s move repeats in November, those buyers in 75% of major indexes would be underwater.

Ontario Real Estate Buyers Need To Pay Up To 6-Figures To Sell Their Home If Needed

Ontario real estate markets went from leading on the way up to the way down. In dollar terms, a typical Kitchener-Waterloo buyer was $146,500 underwater in October. By far it was the worst, with Cambridge (-$140,000), and London-St. Thomas (-$137,000) following not far behind. Six-figure exits from a home in a small city at least an hour from Toronto sounds painful, to put it lightly.

Canadian Real Estate Prices

The benchmark price of a typical home in Canada’s largest markets. 

Source: CREA; Better Dwelling.

Just because a market isn’t negative equity, doesn’t mean it was lucrative. BC indexes would have the most remaining equity—Vancouver ($138,100), Lower Mainland ($100,600), and generally anywhere across BC ($99,700). However, a typical home in those regions was well over $1 million back in March 2022. That means the minimum downpayment was at least $200,000, and well… you can see the problem. Positive equity isn’t always a profit, and the equity falls below the conventional mortgage threshold. That can be an issue if you try to move your mortgage to a new lender.

A Few Lower Priced Markets Are Still Rising, As Credit Expands In These Regions

Not all major real estate markets have seen negative movements since March. The share of equity grew in PEI, Bancroft, and Newfoundland. All of these markets are under the $500,000 mark, so they’re still relatively affordable. Whether it’s worth that much is another argument.

Most of Canada’s Peak Real Estate Buyers Are Underwater

The remaining equity a buyer of a typical home in March 2022 would have in October 2022.

Source: CREA; Better Dwelling.

*Markets where the composite benchmark price was above $1,000,000 in March 2022 were not eligible for high ratio mortgages, and thus required a 20% downpayment.

Negative equity sounds scary, but the only significant concern is to investors. Large mortgage lenders aren’t known for kicking out borrowers that make regular payments. They want your interest payment, not the home that’s worth less than the loan. If you’re planning on living in that home for 10+ years, it’s not a significant concern that you’ll default.

The banks are fine as well, since the loans are generally insured with a minimum downpayment. It’s a pain in the butt, however the borrower paid a nice insurance premium so the bank would be protected. The borrower is still on the hook for the full amount though. 

Investors are in more of a predicament, especially if their business case changes. Many aspiring landlords opted for negative equity investments, hoping appreciation would offset losses. Rising rents might help a little, but the cost of interest and loss of equity are accelerating as well. This may cause more investors to consider cutting losses, or doubling down to top up.

Investors represented between a quarter-to-a-third of the market, meaning there’s significant loss potential. Especially with further headwinds such as global mortgage regulation, and rising interest rates. As the Bank of Canada warned yesterday, it’s becoming difficult to get through the amount of risk. It won’t be systemic, but it’s not going to be easy. 

20 Comments

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  • Sell The CMHC 1 month ago

    Risk happens. Investors were bragging about their tax free gains on the way up, I don’t see why homeowners should get tax funds on the way out as a bailout.

    • Vishal 1 month ago

      The CMHC has produced a dividend that helps offset your taxes, so I don’t know that selling it makes much sense.

    • SR 1 month ago

      I think ever since 2008 the risk paradigm had broken. This is an opportunity for us to fix this and unfortunately unsuspecting people will be burnt.

    • Ida Rab 1 month ago

      Tax free gain? There are capital gains to pay, if you sell, so how tax free?

  • Omar 1 month ago

    This is the Bank of Canada’s fault for telling homebuyers that they would keep rates low until at least next year. How are investors supposed to plan when Tiff is lying to get us to pay more interest to banks?

    • Yusef 1 month ago

      to be fair, if you’re making an investment due diligence is on you. More people need to understand the central bank and politicians aren’t your friends.

    • GERALD SILVA 1 month ago

      If someone tells you to go jump in the lake. Will you, do it?

      • Trevor 1 month ago

        Most people jumped right in line to get those shots when government and media told them to do so…

        Seems like many people blindly follow others..

    • Yoroshiku 1 month ago

      It’s the BOC’s fault for keeping interest rates artificially low for far too many years. The BOC encouraged speculation.

  • Jason Lee 1 month ago

    Agents should be held accountable for telling buyers that rates can’t rise. People that I know that purchased from January to March were all saying their agent is the best, and they said rates can’t rise.

    Greasy used car salespeople make too much money in housing.

    • SR 1 month ago

      Not all agents are equal. I think buyers need to be aware who they take advice from. Most agents have very little financial literacy, how would you expect them to provide proper advice. It matters who you work with, choose wisely.

  • Trader Jim 1 month ago

    Remember, people who bought just two years ago are still sitting on 40% gains or something ridiculous. It was an out of control surge that Tiff said was “Needed,” so let’s not act surprised that it’s happening.

    I own my home and I think we need to see the whole pandemic gains wiped to get back to normal, or we’re going to deal with social unrest and that will be much worse when we have a whole generation begging for change and living in their parents house with nothing to lose, and a delicate system that can no longer pay for itself.

    • Leo 1 month ago

      I don’t think the Liberals mind the young generation owning nothing. It creates a dependency on their handouts which is precisely what they want.

  • EriktheGreat 1 month ago

    This only impacts those who bought right at the peak. The vast majority of investors and homeowners have insanely profited from the massive house inflation that has occurred. These stats appear scary when you see losses but think about just a few years ago… house prices are probably up 50% in your neighborhood. This reminds me of Canadian Tire sales… they jack up prices from 100 to 200… then run a 25% off sale and offer the product for 150. People are like “yea 25% off!”, too dumb to zoom out a few years a realize its 50% higher than it was a short time ago LOL

  • richard 1 month ago

    the interest rates today that everybody is ranting about are still below the 70 year average. there is an ancient eastern saying that ignorance is the root of all suffering. when are the people responsible ie the bankers going to explain why they were so so low for so so long. the reason was to bail out the banks and financial industry in 09. they have conveniently forgotten that. bankers are the root of the problem.

    • Mis Uszatek 1 month ago

      Jesus..same song again…
      “the interest rates today are still below the 70 year average” … now tell me Einstein how many salaries is needed to pay off average home.
      I would rather pay higher rate (which i can always refi) from low purchase price (which is fixed).

  • Brandon 1 month ago

    The link to the global mortgage regulation article is incorrect.

    • Ricky 1 month ago

      All the ‘I’m so smart, I’m going to flee to the booneys during the pandemic’ are in for a serious reckoning. Not only will prices continue to tank in those areas but demand will evaporate. Those who thought paying 1m+ to live in the middle of nowhere is already experiencing a reality check.

      Power is shifting back to the employers as job losses pile and those that don’t come back to the office are the first in line for layoffs. I’ve first hand see the protests to returning to work from remote diminish as the loudest complainers were the first to be let go.

      Traffic is completely out of control so living 1 or 2 hours away is now closer to 2 or 3 hours of commute. Massive selling pressure will continue for the reactionary buyers in pandemic and likely will form a base on prices in areas where employment is heavily situated.

      “Dont wanna come into the office? Don’t come in at all.”

  • Mr.Ziffle 1 month ago

    Sadly realeste industry is all full of fockers.Each professional is ready to exploit your need for personal gain.They are all on board together from realtor to banker…its a witches coven and your the frog in the pot.

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