With an alarmist headline predicts that housing prices will “correct” sometime this year, but according to a mortgage professional in Vancouver, a fundamental misunderstanding is at play.
“It’s as simple as this: basic, unreported inflation,” Dustan Woodhouse, president of Mortgage Architects, told CREW. “There’s an ‘elite class of people’ known as nurses, school teachers, firefighters, and the police, and what they have in common is with a bit of experience, qualification, overtime, they can all make about $100,000 a year. The other thing they have in common is they marry one another and they’re in a 25% tax bracket, so you now have more dual-income households than ever before in history, and those dual-income households are in reasonably accessible jobs in our society.
“Those families now have $12,000 per month after tax in their households. To take on an $800,000 mortgage with a $3,200 monthly payment, they still have $9,000 a month in cash left over. So where’s the problem? That’s what’s driving house prices. That and there aren’t enough of them to buy.”
Lowestrates.ca’s report, entitled “Will the Canadian housing market crash in 2021?”, used a hyperbolic headline, to be sure, but it postulates that the country’s housing prices are headed towards a correction because of the COVID-19 pandemic. The report quotes Hilliard MacBeth, a financial advisor and author of “When the Bubble Bursts: Surviving the Canadian Real Estate Crash,” who says household indebtedness could trigger a financial crisis, and that debt loads are much higher than they were in 1990 when much of the Western world entered a recession.
“The household is much more indebted than it was in 1990,” MacBeth said in the Lowestrates.ca report. “The bursting of the bubble would be much more serious and will probably trigger a financial crisis. It didn’t really trigger a financial crisis in 1990. It was a crisis, but not a systemic financial crisis. This one is likely to be a financial crisis.”
MacBeth further predicted that mortgage defaults will skyrocket and that urban condo markets will spark the crash.
“Rents have dropped a whole lot,” he said. “So monthly losses that were $200 or $300 are now probably $500 to $800. And some of the owners will have trouble with their employment. So they’re going to have to face a real personal crisis in terms of what they are going to do because those condos are really hard to sell.
“That’s probably where the crisis and the crash is going to start is in those investor-owned condo buildings in Toronto, Vancouver and Calgary.”
However, Woodhouse notes that the overwhelming majority of Canadian debt is related to mortgages and that underwriting guidelines have been bolstered to avoid the exact scenarios MacBeth is warning about. In fact, mortgage arrears data has long demonstrated that Canadians curtail their spending before missing mortgage payments.
“When did the investor buy the condo?” asked Woodhouse. “I have clients who paid $250,000 for their condo that’s worth $750,000 today. Other investors who bought more recently put 20% down and had to be very qualified. It’s not some random dude who makes $32,000 a year and owns 19 apartments. Underwriting guidelines to be an investor are so high now. Your rental income coming down by 30% does not trigger a sale of property.”
In other words, investor-owned condos, especially in markets like Toronto and Vancouver, have accrued so much equity that, if forced to sell, the owners won’t incur losses.
“If they bought in the last five years, the qualifying criteria is so high that they have to be very well-heeled investors to purchase property,” continued Woodhouse. “Are there condo investors hanging by a shoestring? Sure. But the mortgage market is 6% rental, and of that 6%, 90% have no trouble servicing their mortgages. You’re down to 1%—if half of that 1% bought five years ago, they’ve got a ton of equity.”
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