Real Estate

11 Signs Canada Housing On Verge of Collapse

A recent Bloomberg article provided a view of the deteriorating condition of the Canadian housing market. It’s dire and in my opinion will get worse because the economy is being pushed to the edge by the Covid-19 coronavirus crisis.

Housing crises are slow-motion train wrecks, so don’t expect the pain to be immediately obvious, like in the stock market. While this might seem to make it more manageable, it actually extends the economic pain. If you are unfamiliar with what a housing-led economic implosion looks like, you should brush up on what happened to the US after 2006 and Canada after 1989.

The US housing collapse took years to eventually bottom, resulting in massive economic dislocation, human suffering and a near-collapse of the global financial system. Coming out the other side of the collapse was a long, slow uphill battle for most.

Canada saw the same after its real estate bust in the early 1990s. Years of stagnation and relatively high unemployment.

Of course, in both the US and Canada the real estate bust eventually created massive opportunities for many.

The following key stats from the Bloomberg article illustrate the immediate vulnerability of the Canadian housing market and the overall Canadian economy:

1) Nearly one in three workers have applied for income support.

2) Canadian households are among the world’s most indebted.

3) Real estate has become Canada’s largest sector. Including residential construction, it accounted for 15% of economic output last year; energy accounted for 9%.

4) The City of Vancouver fears it’s heading for insolvency after it surveyed residents and found that 45% of households say they can’t pay their full mortgage next month and a quarter expect to pay less than half of their property tax bills this year.

5) Canadian households owe C$1.76 for every dollar in disposable income. In Vancouver, that spikes to about C$2.40

6) Canadians owe C$2.3 trillion in mortgages, credit card, and other consumer debt, about equal to the country’s GDP, which is an even higher ratio than the U.S. had before its housing bust.

7) If only 2% of the housing stock were to be listed for sale, it would trigger the kind of supply shock behind a 1990 crash, according to Veritas. That’s most likely to come from investors, half of whom weren’t generating enough cash to cover the cost of owning their rental properties, Veritas found in a survey last September.

9) 30% of apartment rent due April 1 went uncollected, according to estimates by CIBC Economics.

10) Nearly a third of Canada’s Airbnb hosts — who jointly had 170,000 active listings in late 2019 — need the income to avoid foreclosure or eviction, Airbnb said in a letter to the Canadian government last month.

11) Nearly 6 million Canadians have applied for income support. Lenders had deferred nearly 600,000 mortgages, about 12% of the mortgages they hold, as of April 9.

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Real Estate Wealth

What You Must Know Before Deferring Your Mortgage

“No part of the mortgage is forgiven, as many people assume.”

Given massive economic stress on millions of Canadians, Canadian banks are now offering the option to defer your mortgage for up to 6 months. If you’re considering deferring your mortgage payments, there are few key points you need to know.

Mortgage deferral is a fair option for those temporarily in a cash-squeeze as people remain locked-up in their homes. However, no part of the mortgage is forgiven, as many people assume.

The mortgage deferrals simply rearrange financing, potentially leaving you with more debt in the end.

According to the Canadian Mortgage and Housing Corporation (CMHC), which oversees insured mortgages in Canada:

The mortgage deferral agreement does not cancel, erase or eliminate the amount owed on your mortgage. At the end of the agreement, you will have to resume payment according to your regular payment schedule.

NOTE: The interest that hasn’t been paid during the deferral period continues to be added to the outstanding principal of your mortgage. This can affect the total amount you owe in accordance with the original payment schedule.

In other words, you will need to repay the deferred principal amount plus interest on that amount plus interest accrued on the interest.

After the mortgage deferral, you will likely be presented a variety of options by your mortgage lender. The two main options will probably be as follows:

  1. Repay the deferred principal and interest as a lump sum and continue with your regular mortgage payments. This will help you avoid paying interest on the interest, but obviously means you need a big chunk of money.
  2. Add the deferred principal and interest to your mortgage principal, and either increase your monthly payments (to accommodate the higher principal amount) or extend the length of your mortgage amortization. With this option, you will be paying interest on the interest deferred during the deferral period.

For many people there is no other choice but to defer mortgage payments.

If you defer your payments your cash-flow will improve. I suggest putting aside as much money as possible while you have the opportunity. Use this chance so you have more flexibility at the end of the deferral period.

If you must defer, you will need to seriously consider whether your situation will change after the deferral period. Will you be able to pay your mortgage after the deferral period? Consider your options and stay in contact with your mortgage provider if you don’t think the 6 month deferral will be enough.

Deferrals won’t last forever. Use this deferral period wisely.

Real Estate

6 Reasons to be Bullish about Toronto Real Estate

Anyone who knows me and reads this is going to think I’ve lost the plot. Stay with me. I have good reason for writing this article.

Let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.

Before I start, let me first get this out of the way: I (still) think Toronto real estate is outrageously priced. According to Zolo, the average warm pile of bricks in TO sold for $982,189. This is 18.6% higher than last year! The market is tight and homes are on the market for an average of 16 days.

Over the decade ending 2018, the performance of the Canadian housing market was a rarity across the world (chart below). It’s only fair to question whether buying now is a stupid idea.

The market is hot and the current pace of price increases seems unsustainable. Everyone knows how ridiculous TO housing prices are, yet they continue to buy. The market stinks like speculative frenzy. It has for years – but this is the bubble that refuses to pop.

It is quite possible that Toronto real estate experiences a serious correction. It has happened before. There was a moderate correction starting April 2017, with prices recovering since. There was also a deep housing recession in Toronto throughout the 1990s. As you can see in the chart below, Toronto real estate prices took about a decade to break even after 1989. Many people have been waiting years for a ’90s-like correction, missing out on thousands of dollars of upside. Some day, right? Right???

Is a 1990s-style correction imminent?

According to the chart below, mortgage lending standards in Canada are strong. High quality lending standards means fewer defaults, fewer forced sales and less supply. Of course, there is some pro-cyclicality to it all, as economic strength supports incomes – the foundation underpinning lending standards. What happens to lending standards when the economy weakens?

Will there be a correction in the near future, perhaps triggered by a recession? There are smart people on either side of the argument. Let’s put the debate about a near term correction to the side for now. That’s not the point of this article.

The long view

If you’re a 30 year old buyer, maybe you shouldn’t be overly concerned with what happens in 2, 5…even 10 years. After all, a 30 year old buyer is looking to own for the next 30-50+ years. That’s plenty of time to ride out a correction. Even a correction that takes a decade to recover – like during the 1990s – is manageable with a 50 year time horizon, assuming you can keep up with the payments and aren’t forced to sell in a liquidation scenario.

Is Toronto a good place to buy if you have a long-enough time horizon?

For this article, let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.

1) Young(ish) people buy homes as they establish careers and start families. Canada’s demographic trends suggest the home-buying group should grow at a solid rate during the ’20s. This provides a tailwind for Canadian housing demand.

2) Canada remains one of the most attractive destinations for immigrants. Migration coupled with organic population growth makes Canada the fastest growing country in the OECD. New immigrants account for the vast majority of this growth.

This is very supportive to the housing market. Many immigrant populations see home ownership as essential to personal freedom and security. They work hard and do whatever it takes to buy and keep a home. Therefore, Canada’s population growth trend is bullish for real estate.

3) The immigrants coming to Canada are highly educated and ready to work. Most require little government assistance and arrive ready to spend and invest. What’s one of the first things they invest in? A place to raise their families.

4) Everyone that comes to Canada wants to live in Toronto, Montreal or Vancouver. Not all end up in these places – as they discover many opportunities outside of these cities – but the concentration is significant. Toronto in particular contributes almost 20% to Canada’s GDP, so you can see why it is a magnet for immigration. Moreover, Toronto is very ethnically diverse and has built in multi-cultural support..

5) With all this fresh, hungry talent Toronto will soon be second only to San Francisco as a North American technology hub. This trend is self reinforcing, as talent attracts employers and vice versa. Toronto is also Canada’s finance hub. The finance and technology industries will drive Toronto’s economic prospects for decades, supporting Toronto house prices.

6) Finally, although Toronto residents might not see this, the cost to live downtown is still cheaper than many other places around the world. Is Toronto equivalent to London or Hong Kong? Of course not. Not yet. But with ample economic opportunities and solid prospects, comparatively lower cost of living should continue to attract highly educated, workforce ready immigrants from around the world. This again supports Toronto’s real estate market.

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