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…”