The Canadian Housing Crisis Explained
Summary
TLDRThe video script discusses the Canadian housing market's challenges, including high prices and debt levels. It highlights the disparity between income growth and housing costs, especially in cities like Toronto and Vancouver. The script explores factors contributing to the market's issues, such as low housing supply, immigration, and the impact of low-interest rates on investment. It also addresses government efforts to improve affordability and the potential risks of a housing bubble, urging viewers to consider personal financial stability over investment gains when buying property.
Takeaways
- 🏡 Canada is facing a severe housing affordability crisis, with exorbitant property prices, especially in cities like Vancouver and Toronto.
- 💸 Canadian households have become some of the most indebted in the world due to the gap between rising property prices and stagnant incomes.
- 📉 Home prices in Canada have fallen 12% from their peak, but they are still significantly higher compared to a decade ago.
- 📊 Canadian mortgage practices are generally more conservative, which helped the country weather the 2008 financial crisis better than the US.
- 💰 Investor demand, both domestic and foreign, has significantly influenced the Canadian real estate market, contributing to higher prices.
- 🏘️ Canada's housing supply is the lowest per capita among G7 nations, with significant bureaucratic and labor challenges hampering new construction.
- 📈 Interest rate hikes by the Bank of Canada have increased mortgage payments, exacerbating affordability issues for homeowners.
- 🔍 A considerable number of Canadian mortgages are variable-rate or fixed-payment, leading to financial strain as interest rates rise.
- 📉 Despite these challenges, mortgage delinquency rates in Canada remain low, partly due to substantial cash savings accumulated during the pandemic.
- 💼 The Canadian government has introduced several measures to address housing affordability, but significant supply-side issues persist, necessitating meaningful policy changes.
Q & A
What are some key issues facing the Canadian housing market according to the video?
-The key issues include skyrocketing home prices, high levels of household debt, and a lack of housing supply relative to demand.
How has the increase in interest rates affected Canadian homeowners?
-The increase in interest rates has led to higher mortgage payments, causing financial strain for many homeowners, particularly those with variable-rate mortgages.
What is a 'trigger rate' and how does it impact Canadian mortgages?
-A trigger rate is the interest rate level where the entire mortgage payment is used to cover the interest, meaning the principal is no longer being paid down. This can lead to negative amortization, where the mortgage balance actually increases.
Why haven't delinquency rates in Canada increased despite the financial strain on homeowners?
-Possible explanations include the sizable cash savings built up by Canadians during the pandemic and the fact that fixed-rate and some variable-rate mortgage payments do not change immediately with rate hikes, delaying potential delinquencies.
How does Canada's housing supply per capita compare to other G7 nations?
-Canada has the lowest housing supply per capita among G7 nations, with 424 units per 1000 people.
What are some of the government measures taken to address housing affordability in Canada?
-Measures include a tax-sheltered savings account for first-time home buyers, a ban on foreign buyers, and vacancy taxes at various levels of government.
How did the 2008 financial crisis affect the Canadian housing market compared to the US?
-During the 2008 financial crisis, the US housing market was severely affected with a 20% drop in home prices, while Canadian home prices fell only 9.2% and recovered within two years.
What is the impact of population growth and immigration on Canada's housing market?
-Population growth and immigration, particularly to major cities, have increased demand for housing, contributing to higher prices and a tighter housing market.
Why is there a shortage of skilled labor in the Canadian construction industry?
-The construction industry in Canada is experiencing a record high of 80,000 vacancies, partly due to a lack of skilled labor, which is one reason immigration is viewed as part of the solution.
What advice is given to potential home buyers in Canada according to the video?
-Potential home buyers are advised to focus on affordability and risk tolerance rather than trying to time the market, considering housing costs should not exceed 32% of their average before-tax monthly income.
Outlines
🏠 Canada's Housing Market Crisis
Canada is known for its politeness, but recently it's also become known for its unaffordable housing. Homes in places like Vancouver can cost millions, and despite rising property prices, incomes haven't kept pace, leading to high levels of household debt. The video aims to explore the extent of the housing market crisis in Canada, the factors influencing it, and the unique challenges the country faces.
🏙️ Urban Population Concentration and Housing Supply
Canada's population is concentrated in urban centers, with cities like Toronto and Vancouver experiencing high population growth due to immigration. Despite having ample land, Canada has the lowest housing supply per capita among G7 nations, and building new homes is hindered by labor shortages, bureaucracy, and zoning restrictions. Efforts to address housing affordability, such as new savings accounts and taxes, have seen limited success so far.
💸 Investor Influence and Household Debt
The combination of high demand, speculation, and low supply has led to significant investor activity in Canadian real estate, with many homes owned by investors. This has contributed to rising property prices and household debt, with Canadians having some of the highest debt levels in the world. The recent increase in interest rates has cooled the market but also increased mortgage payments, leading to financial strain for many homeowners.
📉 Mortgage Rates and Payment Strain
Variable-rate mortgages have become common in Canada, and the recent interest rate hikes have significantly increased mortgage payments. Many Canadians are struggling to keep up with these payments, and some are even experiencing negative amortization, where their mortgage balance increases over time. Despite these challenges, mortgage delinquencies remain low, possibly due to built-up savings and temporary measures by lenders.
🔍 Navigating the Housing Market
The video advises potential homebuyers to consider affordability and risk tolerance over financial gain. It suggests exploring less populated areas or other investment options and highlights the importance of professional financial advice for those struggling with mortgage payments. The housing crisis in Canada is complex, with no easy solutions, but individuals can take steps to better prepare for market fluctuations.
Mindmap
Keywords
💡Housing Affordability
💡Debt
💡Interest Rates
💡Mortgage
💡Supply and Demand
💡Variable-Rate Mortgages
💡Immigration
💡Negative Amortization
💡Real Estate Investment
💡Financial Strain
Highlights
Canada is known for politeness and recent economic issues like debt and unaffordable housing.
Vancouver's housing market exemplifies high prices with a 1949 bungalow priced at 5.5 million CAD.
Canadian households are among the most indebted globally due to income not matching rising property prices.
Interest rates are rising and home prices have dropped, leading to concerns of a housing bubble.
Canadian real estate has been resilient with a quick recovery post-2008 compared to the US.
Canada's conservative mortgage lending and robust banking industry contributed to housing resilience.
Canadian property prices have doubled in the last decade, outpacing wage growth.
High property prices in Toronto and Vancouver are significantly above the average family income.
Canada's large land area contrasts with its population concentration in urban centers.
Immigration has fueled population growth, primarily in large cities, affecting housing demand.
Canada has the lowest housing supply per capita in the G7, contributing to unaffordability.
Supply-side issues include labor shortages, bureaucracy, and zoning restrictions.
Government measures to improve housing affordability have seen limited success.
Low interest rates post-2008 led to an influx of investment into real estate.
Investor demand in Canadian real estate is primarily domestic, not foreign.
Canadian households have high levels of debt, with mortgages being the majority.
Recent interest rate hikes have increased the burden on mortgage holders.
A significant portion of Canadian mortgages are variable rate, impacting many with rate increases.
Mortgage delinquency rates in Canada remain low despite financial strains.
Canadians have built up savings as a buffer against higher mortgage payments.
The current trends in the housing market are unsustainable without policy changes.
Personal strategies for dealing with the housing market include focusing on affordability and risk tolerance.
Transcripts
around the world Canada is known for a
number of different things Putin saying
the word a general politeness
pronouncing the word boot totally
normally but more recently some less
endearing things have been added to that
list debt and unaffordable housing you
see in places like Vancouver British
Columbia it's not uncommon to see homes
like this three-bedroom 1949 Bungalow
going for 5.5 million dollars
albeit that's in Canadian it's only 4.1
million in American dollars but as
property prices have risen in the
country incomes have not kept pace
leaving Canadian households to become
some of the most indebted in the world
as home buyers have made up the
difference between their incomes and
house prices using debt now interest
rates are on the rise home prices are
down 12 from their Peak and people are
starting to wonder if Canada's housing
market is in a soon to pop bubble so as
your resident Canadian Finance YouTuber
I wanted to make this video to help
answer the question
how bad is it really and to be clear
it's impossible to predict where things
will go from here and to try and time a
crash and I'll try to explain the
important variables that will influence
the outcome one way or another without
making a grand statement about how now
is the time to short Canadian housing
but many Canadian households are
currently experiencing significant
financial strain and while there are
some unique advantages Canada has when
compared to the US and the real estate
space there are also some pretty
depressing unique features to Canadian
real estate that makes the area harder
to manage than an asbestos-laden popcorn
ceiling so let's talk about real estate
in Canada
buckle up it's going to be a ride on
today's plain bagel
during the 2008 financial crisis the US
housing market was pummeled Rising
interest rates combined with
unsustainable lending practices caused
mortgage delinquencies to Surge and home
prices to lose a fifth of their value
contributing to one of the worst
economic ruts in U.S history
just north of the Border however things
were a lot less dramatic despite
Canada's heavy economic ties to the US
home prices in the country fell just 9.2
percent from their peak in 2008 to their
trough in 2009 and while it took nearly
a decade for U.S properties to return to
their previous High Canadian properties
recovered all of their lost ground
within two years many attributed this
resilience to Canada's sound mortgage
lending practices and robust banking
industry whereas America is fragmented
and Loosely regulated Finance sector had
allowed the proliferation of risky loans
speculation and leverage upon leverage
in the real estate space Canada's
mortgage lending activity was much more
conservative with the market being
dominated by large well capitalized and
diversified players were carefully
watched in their Investment Banking and
mortgage lending activities by
Regulators the tenacity of Canadian
housing has however proven to be a
double-edged sword because while America
cause real estate slump did have the
silver lining of making properties more
affordable for a period of time Canadian
properties never experienced a similar
correction even after accounting for the
recent slump from their pandemic high in
2022 Canadian home prices have doubled
in the last decade compared to hourly
wages which have increased a meager 24
percent roughly over that same time
period now it's estimated that
homeowners require a minimum income of
one hundred and eighty thousand dollars
to afford the average property price of
750
000 the median family income sits at
roughly 121 thousand dollars or thirty
three percent below this amount but
that's at the aggregate level things are
craziest when you dive into Toronto
Ontario and Vancouver British Columbia
two of the top three most populous
cities in Canada with roughly a quarter
of the population between them average
prices in these two cities have reached
1.1 and 1.2 million dollars Toronto and
Vancouver respectively that's roughly
nine times the average economic family's
total income for both cities or double
that in some markets if you were hoping
for a detached home making the
traditional concept of home ownership
for young Canadians a bit of a pipe
dream in some areas
now for anyone outside Canada this might
all sound a little shocking to you
because if you look at a map of our
beautiful country you notice that the
one thing we aren't missing
is literal space Canada is the second
largest country in the world and ranks
just 38th in terms of population size
How could a country with so much of this
key ingredient struggle to house its
population
well well there are many rural townships
across the country where you'll find
more affordable housing Canada's
population is heavily concentrated
around its cities with roughly three
quarters of the population living in
large Urban centers and the density in
these areas is only going up between
2016 and 2021 Canada had double the
population growth of every other G7
country at 5.2 percent thanks primarily
to immigration vast majority of which
was to the country's larger cities and
in fact Canada saw its population surge
2.7 last year alone welcoming over 1
million people for the first time in its
history but while population growth
obviously plays an important role when
it comes to real estate immigration has
played an important role in supporting
the economy and Canada's aging
population not to mention there are many
cities in the U.S with a higher
population density than Toronto that
don't struggle with Sky High property
prices so what's causing in Canada's
Market to stand out in terms of
affordability
well simply put one of the key
differentiators here is a lack of Supply
Canada has the lowest housing supply per
capita out of the G7 Nations at 424
units per 1000 people with the federal
housing agency estimating that Canada
would need 5.8 million new homes to
restore affordability by 2030. 2.5 times
what the country is on track to complete
and while building more homes seems like
a simple solution here there are some
meaningful roadblocks to that objective
for one there's a lack of skilled labor
in the space with Canada experiencing a
record high of 80 000 vacancies in
construction part of the reason
immigration is actually viewed by many
as being part of the solution not the
problem bureaucracy and red tape have
also made building real estate in Canada
a particularly cumbersome Affair one
expert estimates it takes 8 to 10 years
to go from acquiring an undeveloped
piece of land to building the prop
property in Toronto and Zoning
restrictions imposed by municipalities
across the country have made the
densification of land incredibly
difficult in Toronto for example the
majority of land only allows for single
family developments with mid to high
rise buildings only typically being
permitted in limited locations despite
it being the most populated city in the
country of Canada this is actually why
that house from the beginning was listed
for so much it had the Zoning for a
larger property demonstrating just how
rare that is for some of these cities
now Canada's government has tried a few
things to solve housing affordability
such as a recently announced tax
sheltered savings account for first-time
home buyers a ban on foreign buyers and
a vacancy tax introduced at the federal
provincial and Municipal level in some
cases more attention has also been
brought to the zoning restrictions of
major Canadian cities
but we've yet to see meaningful progress
on the supply side of things in fact
Ontario's Premier Doug Ford recently
found himself in hot water for planning
to open the protected Greenbelt Iran
Toronto for development only to reverse
those plans on allegations of corruption
so yeah building more homes has been
easier said than done and this imbalance
of supply of homes with actual demand
for property has only been exacerbated
by The Rock Bottom interest rates of the
last 15 years or so and the resulting
inflow of investment Capital into the
space following the 2008 financial
crisis many central banks for developed
countries including Canada dropped their
policy rates to near zero but try and
bolster lending activity this caused
mortgages the loans for buying
properties to become Dirt Cheap while
making fixed income Investments which
now paid investors a lower yield a lot
less attractive as a result many
investors took their money and put it
into real estate given that it could be
bought with cheap debt rent it out for
extra income and had a track record for
actually appreciating over time now this
factor is obviously not unique to Canada
we've seen similar asset price inflation
in the US thanks to its low interest
rates but given how long it's been since
Canada has experienced a real estate
correction prices were already starting
off with a relatively High base
and with Canada's particularly resilient
reputation investors flooded in in 2020
it was estimated that one-fifth of all
homes in British Columbia Ontario New
Brunswick and Nova Scotia were investor
owned with this percentage being as high
as 42 percent in some subdivisions of
Vancouver with higher student
populations it is worth highlighting
that this investor demand has primarily
been domestic so far well non-resident
ownership is as high as 14.9 percent in
the student-centric subdivisions of
Vancouver across the province of British
Columbia the rate is much lower at seven
percent of Condominium Apartments and
2.5 percent of houses and while units
not occupied by their visual residence
it's at roughly seven percent for both
Toronto and Vancouver some of which may
be vacant this figure can also include
certain types of student housing or
other forms of housing which by
definition are not occupied by usual
residents but they're being mixed
figures and debate on how many
properties in Canada are truly left
vacant by investors and the like so
while foreign investors have had an
influence on pocket regions of Canada
instead it's truly the combination of
all these variables the policies
encouraging high demand and speculation
without a subsequent follow-up in Supply
and as Canadians have tried to keep pace
something else has crept up to pretty
concerning levels
as prices have outpaced savings buyers
have borrowed the difference
contributing to record levels of debt in
the country Canadian households had a
record dollar 85 of debt for every
dollar of disposable income in the third
quarter of 2022. with 75 percent of this
debt being tied to mortgages this is the
highest level of household debt among
the G7 Nations and makes Canadians some
of the most indebted people in the world
with household debt to GDP being higher
now in Canada than it was in the U.S
leading up to the financial crisis
now with the Bank of Canada recently
hiking its Central Bank policy rate from
0.25 to 5 to combat inflation we have
seen a cooling down in the space
recently with home prices and debt
levels in the country both pulling back
but in the near term these same rate
hikes have actually exacerbated the
affordability problem after all the rate
you pay on a mortgage is a determining
factor in the size of your monthly
payment with the Bank of Canada hiking
its policy rates so drastically we've
seen mortgage payments Skyrocket across
the country mortgage payments as a
percentage of income have reached 59.3
percent in the second quarter of 2023.
up from 43 percent just two years ago
this not only discourages new demand for
Real Estate perhaps an intended outcome
but it also hurts those already in the
market if you took out a 500 000 25-year
mortgage at the typical one percent
variable rate available to you on
January 2022 your mortgage payment at
the now 6 rate would be jumping from
roughly one thousand eight hundred and
ninety dollars a month to three thousand
two hundred and twenty two dollars a
month within the span of nine months and
this isn't just a hypothetical
possibility news outlets have already
started sharing stories about Canadians
who were convinced they were making a
fortune building investment for their
future and now face the possibility of
financial ruin as a result of their
skyrocketing monthly payments now you
might be thinking sure that sucks for
variable rate borrowers but exactly how
many home buyers opted for a variable
rate
well in the last few years the majority
actually you see when rates are at the
Rock Bottom levels during the pandemic
variable rates on mortgages were
actually offered at a substantial
discount to fixed rate mortgages with
banks wanting to pass along the interest
rate risk of these loans and since home
buyers had spent a decade in a low
interest rate environment many assumed
low rates would continue which has led
to one-third of mortgages in Canada to
be variable rate but wait there's more
in Canada fixed rate mortgages aren't
really fixed rate either rates are only
locked in for a period of typically five
years or less after which the mortgage
rate resets based on the market rate of
the time that means that over the next
five years virtually every Canadian with
a mortgage will see a financial impact
from these higher rates and while that's
scary enough there's one final Quirk
about Canadian mortgages that really
highlights how devastating this can be
for Canadian households with the
exceptions of Saskatchewan and Alberta
mortgages in Canada are recourse loans
this means that if you don't pay off
your mortgage in full lenders can go
after your personal assets to make up
the difference even if you relinquish
your house if prices continue to fall
Canadians who can't afford their High
interest payments may not be able to
recover the amount from selling their
house to pay off their mortgage which
won't decline in Step meaning they'll
still be making payments on that
difference even after losing all the
equity from their prior payments but if
the prospect of your property falling in
value below what you actually owe on
your mortgage wasn't bad enough
it gets worse because some Canadians are
actually seeing the balance of their
mortgage
increase three quarters of variable rate
mortgages in Canada are fixed payment
mortgages meaning that the borrower
makes the same dollar payment each month
regardless of what interest rates
actually are fluctuating rates still
impact the policy but they simply change
how much of the payment goes towards the
principal versus the interest expense if
rates go down the mortgage will actually
be paid off faster but if they go up a
larger portion of the payment will
simply be going towards that interest
expense instead of paying down the
principal and when they go up as
drastically as they did in 2022 they can
reach what's called their trigger rate
where the fixed payment is entirely
taken up by interest and home buyers are
no longer paying down their mortgage
balance and when rates go past this
point borrowers can either increase
their payments pay off a chunk of their
principal or if none of those options
are available apply the interest back to
the principal something called a
negative amortization mortgage and while
this might sound like an impossible
possible nightmare scenario where
unfortunately already seen it happen the
Jordan estimated back in May that over
three quarters of variable rate fixed
payment mortgages had surpassed their
trigger rate a figure that's surely
higher now given the subsequent rate
hikes we've seen and more recently three
of Canada's big six Canadian Banks
disclosed that 20 percent of their
mortgage portfolios consisted of
negative amortization loans so yeah
that's how crazy things have gotten in
Canada but it does all beg the question
why haven't things crashed yet
with everything we've covered so far you
would expect that delinquencies in
Canada would be skyrocketing right about
now yeah as of recording the most recent
delinquency rate for mortgages is near a
record low at 0.15 percent there are
some possible explanations as to why
this is the case with one of them being
that given the pyre Stakes many
Canadians are trying to tough out the
turbulence in hopes that things will
moderate you see during the pandemic
Canadians actually built up sizable cash
savings with checkable and at notice
deposits Rising 40 between 2019 and
2022. this has given Canadians a bit of
a buffer to make these higher mortgage
payments there's also the fact that when
it comes to fixed rate mortgages and
even some of those variable rate ones
those payments obviously might delay a
delinquency by not changing immediately
even if in some cases it's actually
extending the overall cost of the
property to the buyer meanwhile new
listings are so far down from a couple
years ago suggesting that those able to
are waiting to sell even if demand Falls
an InStep decline in Supply could keep
prices elevated it all goes to show why
it's so difficult to predict where
prices will go in the short term on the
one hand higher rates could go higher
still and for some widespread
deleveraging with demand for properties
especially from the investor group
following listing surging prices for
Real Estate declining and they're likely
being a severe Financial impact on the
country given that 21 of national wealth
and 1.3 million jobs are tied just to
residential investing on the other hand
with inflation down from its peak levels
there is a chance we see more progress
here and that central banks actually
consider cutting rates which could be
enough to alleviate pressured buyers
many lenders are also actively reaching
out to borrowers to try and ease the
contract terms and extend amortization
periods with Canada generally having
more conservative lending practices
debt-laden home buyers may get whether
the storm with a Re Max report
highlighting the low loan to value
ratios of Toronto and Vancouver and the
shrinking percentage of buyers with
credit scores under 660 in the report
titled Canada housing market risk low
despite short-term contraction they are
a real estate agency so do keep that in
mind what is clear however is that the
current trends all taken together
are not sustainable and the current
housing crisis does face the risk of
evolving into a financial one without
meaningful government action and policy
change and regardless of the outcome the
situation is already hurting Canadians
across the country so far we've only
talked about aggregate statistics but
within that there are a lot of people
falling through the cracks none of the
typical stress tests apply to mortgages
in Canada would have considered these
surging rates we've seen and while you
can blame those falling behind on
mortgage payments for buying into a hot
Market when they couldn't afford the
surge in rates most people aren't real
estate experts and not many people could
have predicted the surge of rates we've
seen and given how much of real estate
is commission based even those in the
industry are unfortunately more
incentivized to focus on generating
sales than ensuring budget feasibility
when it comes to buying a house with
many buyers being told that so long as
you could get approved for a mortgage it
was worth buying a property regardless
of your situation so if you're
considering buying real estate
especially your first property you
should focus on affordability in Risk
tolerance as opposed to financial gain
it's true that real estate can be a
lucrative investment and even with all
these negative variables prices could go
up from here but rather than trying to
time your purchase for the next crash
worrying about missing out or deciding
to short the market for your first home
you should really focus on your personal
wants and whether you can afford the
payments and the volatility the risk of
payments going up home prices do tend to
appreciate over the long term but that
won't matter if you can't afford things
in the near term I'll leave a link to a
helpful resource from the Canadian
mortgage and housing corporation on home
buying but the one thing I'll point out
from there is the recommendation that
housing costs do not exceed 32 percent
of your average before tax monthly
income but you should also consider your
level of savings and other risk
tolerance variables when buying a home
I'll also include a link to the home
school series by global news a set of
Articles targeted at educating new home
buyers they were actually written by my
good friend Craig Lord who you might
know has helped with my channel in the
past so definitely go check those out if
you can't afford a property right now
you can consider a less densely
populated area if your situation allows
it or you can park your money in other
Investments so it continues to grow
while you wait if you're really worried
about missing the bandwagon there are
other Investments such as real estate
investment trusts that can provide you
some real estate exposure without you
needing to put your whole financial
well-being at risk and if you are
currently experiencing strain from your
mortgage speak to a professional whether
that be in a financial planner or
advisor a certified credit counselor or
a licensed insolvency trustee they can
help you decide whether you should sell
the property hold through the turmoil or
consider other options and to be clear
none of this is to suggest that dealing
with the situation we find ourselves in
will be easy I haven't even talked about
renters who are likewise seeing the
pressure of High real estate properties
and high interest rates on their monthly
budgets but at the personal level there
are things you can do to help better
prepare yourself for whatever comes of
the Canadian real estate market whether
prices continue moving painfully onwards
or we see a crash in real estate values
but that's a video thank you for
watching if you liked it please do make
sure to like subscribe all that good
stuff it does help the channel
tremendously and if you're a Canadian
who's bought a property in the last few
years I'd be very interested in hearing
your story and what your thoughts are on
all of this I also want to give a shout
out to another fellow Canadian
influencer although I'm guessing he'd
probably take insult at that label
Millennial is someone who's been
posting a lot of great stuff about the
state of the Canadian real estate market
on Tick Tock and here on YouTube albeit
to a smaller audience and I know I've
been critical of Finance content on Tick
Tock in the past but his stuff is great
I particularly like his Canadian homes
versus literal castles series and I did
actually come across a few of my sources
for this video from him so be be sure to
check him out anyway thanks for watching
and as always
be safe out there
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