The Canadian Real Estate Bubble Was Just Delivered Its Final Blow: BMO

One of Canada’s largest banks is calling the housing market’s time of death — 10am Wednesday July 13, 2022. That’s basically the message from a BMO Capital Markets note to investors on Friday morning. Canadian housing affordability was already stretched to the limit, requiring price cuts to keep moving . Add this week’s rate hike, and mortgage payments are now past the late 80s — Canada’s most extreme bubble. That last bubble also unfortunately resulted in the country’s most extreme price crash.

Canadian Real Estate Was Just Delivered A Technical Knock-Out (TKO)

Canadian real estate was delivered a widely anticipated, but still fatal blow. On Wednesday, the Bank of Canada (BoC) hiked the overnight rate to the highest level since 2008. By doing so they’re hoping to reduce “excess demand” and tame price growth’s 40-year high. That (intentionally) will make it difficult for prices to continue climbing.

“Wednesday’s 100-bp rate hike by the Bank of Canada might be a TKO for the housing market (at least for anyone that had any doubt a correction is underway),” warns BMO senior economist Robert Kavcic. 

“The simple arithmetic makes it so,” he adds before comparing the absurd valuations. 

Canada’s Already Stretched Valuations Have Reached Absurd Levels

The bank’s napkin math shows how much prices would have to come down to make sense. He estimates an average-priced home in Ontario had a monthly mortgage payment of $3,000 last year. It was already very high, but assuming today’s mortgage hits 4.5%, that same home is $4,700/month. It’s a record that blows right past the late-80s real estate bubble.

Remember, he’s not talking about Toronto. This is the whole province, where far suburbs outperformed the City. Balancing his numbers shows prices need to fall about 36% less annual income growth. That would support last year’s level of sales with the same level of scarce inventory. Today is much better supplied and sales are worse, so this is interesting. It’s going to be hard to maintain this level of sales without prices coming down further. 

He also notes that’s with the slight price declines seen in the second quarter of this year.  

Canadian Real Estate Just Blew Past The Late-80s Bubble, Now Making It The Most Extreme

Canada’s late-80s real estate bubble was the most extreme in the country’s history. What followed was also the most extreme price correction. It resulted in real estate prices stagnating for nearly two decades afterwards. Today’s environment is much worse.  

“Even after deflating mortgage payments to account for income growth over the decades, the ‘real’ mortgage payment will eclipse those seen at the height of the late-1980s market,” he said. 

“That is, of course, unless home prices continue to decline. And they are…”

18 Comments

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  • Sam Smith 3 months ago

    Lack of supply and uncontrolled immigration will never allow the home prices to go down, even minimally. 80’s was completely different. At that time there was no Greenbelt and there were abundance of new homes.

    • Han Thanh 3 months ago

      Correct. That’s why prices are falling $1k/month and Toronto has never had more listings canceled and relisted to pretend there’s no price cuts, just a new listing with periods in random places to make sure it doesn’t flag the listing history.

    • Anthony 3 months ago

      False. 70% of condo owners are investors as soon as there ROI goes negative which it will in many cases that supply will shore up. Immigration will create demand for rent but not all of them are coming from Hong Kong with loads of liquidity. The average wage of new immigrant is 30k a year. Supply will be in abundance by end of the year q1 2023.

    • RM 3 months ago

      … says Sam Smith of the internet in response to Robert Kavcic of the Bank of Montreal.

    • Michael 3 months ago

      Hey Sam , immigration has been ingrained in the Canadian real estate market since 1903 when it first went through 100,000. In 1913, it hit its highest level ever at 400,000 immigrants and we haven’t come close since. The second highest immigration ever was between 1990 and 2000 (just 25,000 average immigration below current day). Ironically that was the start of the worst two decade housing crash in Canadian history. History is quite clear on this point, immigration cannot save the Canadian real estate market. I do not know how this ends, there are simply too many variables, I’m just fairly certain when it does end, it will hurt.

      • johnny magi 3 months ago

        that is probably the best reply… there are so many variables. And my self being internet couch economist I think there will be some losers and some winners. More indebted and stretched out you are, I feel you. I did the very same in the last housing crash. Things go really good in till they don’t.

    • Lu 3 months ago

      Lol you must be a realtor.

    • DR 3 months ago

      Sam, our immigration is controlled at 300K annually (excluding 2021-2023 to make up shortfall for 2020), which incidentally barely matches deaths in Canada annually.

      Annual deaths were 200K in 2000, and have risen additional 5K/yr and most likely continue with same trend or possibly go higher with the number of COVID-19 infections we’ve had with lack of provincial public health protections, resulting in late term complications/deaths.

      Canada’s birth rate is also declining.

  • Ike 3 months ago

    $3000 to $4700 per month to carry the same mortgage. Houses are much more affordable now!

    • David Chan 3 months ago

      That’s why he’s saying prices are going to fall until it’s back to $3,000, genius. $1k/day seems like a good starting pace to get there.

      • Michael 3 months ago

        Hey David, I agree, this market may continue on its trajectory upwards with minor corrections, or this may plummet to the depths of pre-2005. It’s anyone’s guess right now. The key factor in home prices is going to be the length of time interest rates remain elevated. A short term spike will be manageable by most; however, sustained and elevated rates will gradually erode even the most stable debt-laden homeowners. Whatever the average house price is at $3,000/mth at 5.5% is the floor. Unfortunately, right now the average house price is whatever $3,000/mth buys at 2.5% interest…so we have a ways to go, according to the back of my napkin math.

        • Michael 3 months ago

          I meant, “right now the average house price is whatever $4,700/mth buys at 2.5% interest”

          Forget the stairs, this may be an elevator down…

  • richard stanbridge 3 months ago

    are central banks worthwhile? are they efficient? would markets be better off without them? they have a terrible track record of blowing bubbles until they crash. i am 70 years old and they have been doing it my entire life. the history of central banks is quite interesting.

    • Kevin 3 months ago

      Most people misread which part is the market and which part is the central bank. The CB supressed rates during a time of risk to inject liquidity. The current hikes are them trying to let the market do its thing, but they’re too worried about letting it actually do it so they inflate a bubble in the meantime.

  • Woolsock 3 months ago

    We looked at a rental house not too long ago, just outside of Hamilton: proper detached house, good hood, nice but nothing super special. They wanted a year lease. $6000/mo. For rent. ($72K for a year!)

    Thinking they maybe bit off a tad more than they could chew.

    • J 3 months ago

      That’s what I’ve been telling everyone in my circle that’s been telling me to “get-in” and build equity. And I’ve always fought back with – what equity? It’ll massive interest load on top of the principle mortgage amount. The limit was hit around 2008 – everything past that point was the bubble inflating beyond fundamentals. 72K rent a year… a house hold would have to make 250k after tax to support such a rental market. Next election is going to be all about combating money laundering. Whichever party makes that their mandate will get my vote.

  • This Will End Badly 3 months ago

    Then you add the fact that in addition to the extra 1700 per month, when you refi and your home that was worth(on paper) 1mil has now been assessed to be worth 700K, and the bank will only give you 700K and tell you you have to come up with the other 300K, thats when the housing market will collapse. Few people understand, that when you refi using negative equity you will owe the bank the difference.
    OHHHH Canada.

    • Michael 3 months ago

      Hey “This Will End Badly”…your point is very important especially since by definition, a ‘refi’ means when the terms of an existing loan, such as interest rates, payment schedules, or other terms, are revised. Mortgage holders in Canada will find the banks very restrictive at renewal and any changes will be considered a ‘refi’ and that means the banks have the right to re-appraise the property, the LTV and the mortgage holder. You may owe the bank the difference and/ or, you may also have to pay CMHC insurance. Mortgage holders faced with having to come up with $35,000 – $100,000 within 90 days may have no choice but to sell before the market adjusts further. What most people don’t realize is, this is happening with the backdrop of a massive increase in their monthly mortgage payment on a property they have lost their equity in. Most homeowners faced with this trifecta of pain will opt to exit quickly before it gets worse…most won’t have a choice.

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