Rearranging The Deck Chairs
Happy Monday Morning!
Housing affordability continues to worsen across the nation. While prices are indeed falling, they have not dropped enough to offset the increase in mortgage rates. I gave the following example a few months ago, but basically house prices would need to drop about 25% in order for mortgage payments to be as “affordable” as they were at the peak of the market earlier this year.
Let’s assume 80% LTV, 30 year amortization on a million dollar house. Mortgage rates double, but price declines 25%.
$800k mortgage at 2.5% = $3156
$600k mortgage at 5.0% = $3202
A recent report from RBC has also picked up on this issue. RBC’s aggregate affordability measure hit a record high nationally, now sitting at 60%. In Victoria (67.6%), Vancouver (90.2%) and Toronto (83.0%) in the second quarter of 2022.
This seemingly needs to be resolved either through lower prices, or lower interest rates, perhaps both. This has prompted CMHC to revise their house price forecast, now suggesting national home prices will drop by 10-15% by mid 2023. I’m not sure what data CMHC is looking at, but the national home price index is already down 12% since peaking in March. So by that account the correction is nearly over? I have my doubts.
Affordability is in the dumps, buyers are waiting for prices to drop and sellers are digging in their heels. In other words the gap between buyers and sellers expectations remains wider than ever. Sales have ground to a standstill. September home sales in Greater Vancouver dropped 46% year-over-year, and trickled in at their lowest levels in nearly 30 years. Besides this month, the only other slower Septembers are 2008, 2012, and 2018.
So let’s talk about the knock-on effects. Affordability sucks, home sales are hovering around multi-decade lows, prices are falling, and the Bank of Canada has committed to even more rate hikes. It’s no surprise that developers are now slamming the brakes on new project launches. If you’re launching a project today you better have deep pockets.
Access to credit remains tight, with bearish calls on the housing market increasing. Just look at recent news surfacing from one of Canada’s largest private debt funds, Romspen, which just paused redemptions on their investors. The fund, which has about $2.8-billion in assets as of the end of June, told its investors looking to cash out that they may have to wait, citing delays in loan repayments and the need to protect against loan losses. The company uses investor money to provide mortgages to higher-risk commercial developers, who typically don’t qualify for bank loans. Per the Globe & Mail, more than $700-million has been returned to Romspen’s investors over the past 18 months, and the current redemption queue represents roughly another $325-million – about 12% of the fund’s assets.
In other words, access to credit will only get tighter for property developers. Ironically, this will likely exacerbate future housing shortages several years down the road. In case you missed it, population growth in Canada grew by nearly 285,000 in the second quarter, a 0.7% increase that was the largest since Newfoundland joined confederation in 1949. Over the past year we’ve added nearly 700,000 people. Where exactly are these people going to live? What is the plan?
Rates up, prices down, affordability down. Like rearranging the deck chairs on the Titanic.
Another issue is about current homeowners who were thinking about a move. Whether for downsizing, changing locations, or buying a larger home, it does not make sense if a mortgage is needed.
Giving up the current mortgage will mean a new mortgage at a much higher rate.
This is another reason to delay selling a property with an existing mortgage.
Steve, your reporting is bang on and the numbers show it. Well Done Sir!
PS: ever thought of being the federal finance minister… We Need One !