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. 

9 Comments

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  • Reply
    Sell The CMHC 4 days 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.

    • Reply
      Vishal 4 days ago

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

  • Reply
    Omar 4 days 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?

    • Reply
      Yusef 4 days 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.

    • Reply
      GERALD SILVA 4 days ago

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

  • Reply
    Jason Lee 4 days 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.

  • Reply
    Trader Jim 4 days 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.

  • Reply
    richard 4 days 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.

  • Reply
    Brandon 4 days ago

    The link to the global mortgage regulation article is incorrect.

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