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Douglas Todd: Canada’s housing market has turned on its head. Here are 5 things to know

Analysis: A 'fear of missing out' has given way to 'a fear of getting screwed,' says one mortgage broker.

It’s hard to keep up with all the things that have flipped since Canada’s COVID-crazed housing run up.

The pandemic-induced exodus to spacious homes in the suburbs has collapsed. Mortgage rates are jacking up dramatically to counter the excessive stimulus governments pumped into the economy. A recession is possible.

Homes sales are dropping fast and housing projects are being cancelled. Many buyers are waiting for a lower-cost purchase.

But, as mortgage broker Ron Butler has quipped, a “fear of missing out” — or FOMO — has given way to “a fear of getting screwed.”

And while there are housing difficulties in many countries now, don’t be lulled into thinking Canada is like elsewhere. Price jumps here have been more extreme. So now everyone is vulnerable to a bubble.

Here are five things to know about the recent about-turn in Canadian housing:

1. Looking for bargains

“Greater Vancouver home sales dropped 32 per cent year-over-year in May,’ says real estate analyst Steve Saretsky.

“Affordability was already an issue and rising interest rates have only exacerbated this. Many buyers are now waiting (and) hoping for prices to fall to … offset the cost of borrowing.”

Robert Kavcic, the Bank of Montreal’s senior economist, puts it this way: “The frothy psychology in Canada’s housing market has been broken by higher interest rates. No more widespread speculation, rampant pre-construction assignment flipping or FOMO buying.”

Prices have already dropped 15 per cent and more in some suburbs of Vancouver and Toronto. Big-city cores could well be next, despite urban Canadians getting used to decades of strong demand from domestic and foreign buyers and speculators.

With the Bank of Canada raising lending rates in the past couple of months, the typical five-year fixed-rate mortgage has jumped from about 1.75 per cent to five per cent and more. Many of those who overstretched to go all-in could soon be feeling burned.

Distressed sellers are already putting places on the market in Greater Toronto. And, as specialist John Pasalis notes, even the Bank of Canada doesn’t expect the full impact of interest rate hikes to be felt for 18 to 24 months.

“2023 could get challenging for highly leveraged households if rates stay high and if we indeed see a recession and job losses,” Pasalis says. “That’s when Canada could really feel the downside of basing much of its economic growth on driving up household debt.”

2. The crisis is worse in Canada

Some politicians and real-estate players try to minimize the housing emergency in Canada by pointing to how residents in many well-off countries are struggling with housing costs. But don’t be distracted.

Even The Economist has zeroed in on Canada’s problem, saying, “A comparison between Canada and other rich countries should give rise to some concern. Since 2000, the average house price has more than tripled in Canada. In America, by contrast, it is up by about 60 per cent.”

The housing sector is gigantic in Canada — it consumes 37 per cent of investment capital, much higher than in more diversified economies. And household debt is worryingly greater in Canada than in most nations, at 185 per cent of disposable income.

3. Canada’s market has been supercharged by investors

At last count, 22 per cent of Canadian mortgages were held by individual investors who bought up second, third and fourth units to rent or flip.

Many bought in a frenzy by borrowing against their own homes, when mortgages were rock bottom. Even with residents of Vancouver and Toronto struggling with some of the most unaffordable property in the world (the typical price in Greater Vancouver is $1.26 million), pandemic investors were among those making several offers on homes, squeezing out first-time buyers again.

Governments did nothing to stop the speculation. And we’ll never know if their inaction has to do with a large number of federal Liberal cabinet ministers and Ottawa MPs (as well as MLAs in Victoria) being among those investors.

4. Two factors will still put upward pressure on housing

Higher mortgage rates are going to reduce demand and likely prices.

But not all pressure will disappear from the market. With many developers starting to back away from giant projects because their profit margins have declined, it could lead to less housing available down the road.

And, with borders opening, it’s projected Canada will welcome a record-breaking 500,000 immigrants this year. They are joined by a new stream of 140,000 international students and roughly 450,000 guest workers, who will place more pressure on urban rents, which are surging. Many newcomers, naturally, seek to own property.

5. What about a mortgage?

Eighteen per cent of Canadians recently told Manulife they already can’t afford their own homes. But, then again, only 35 per cent of Canadians have mortgages, typically of the variable variety.

“A lot of people ask me what they should do, lock into a fixed-rate mortgage or variable rate?” Saretsky said.

“If you know for sure that you’re going to be in a property for the next five years then fixed is typically the way to go. However, over 50 per cent of Canadians end up breaking their five-year mortgage before the term expires, often incurring huge fees to break their term early.”

And that just one factor to weigh. Even in this softening market, it remains buyer beware.

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