The Renewal Crisis

No one is talking about it but many are thinking about it and if they aren't, they really, really should be.

It’s no secret here in Canada that the housing market is a gigantic part of the economy. As the housing market goes so does the Canadian economy. Like it or not, this is the truth. There are so many businesses and services that are dependent on the housing market it is truly unbelievable. When the housing market is booming everything is groovy and everyone is in LA LA land.

When it slows down it feels like when you were young and at a party, you are finally dancing with the girl you wanted to dance with all night, and your fucking father is banging on the window like a gorilla because he needs to get back home to his Star Trek reruns. But I digress.

When the housing market slows, the oxygen gets sucked out of the room quickly. If you were smart/lucky and you have some cash saved up you might make it through the storm that’s brewing and get to keep your home. If you are over leveraged and hanging onto your FAANG stocks, have $2300 in your bank account for a rainy day and are basically insolvent if your pay checks stop coming every two weeks. You are in for some serious decisions.

Folks we have a big problem brewing under the hood of this car. Maybe most are sitting with blinders on and hoping like hell that interest rates will start dropping really soon. But the way people are still out spending money like drunken sailors, the central banks will have no choice but to keep raising rates.

What happens if the Bank of Canada raises rates in December by another 50 or 25bps? Will that signal to everyone that has been waiting on the sidelines that it is finally the right time to jump back in? Will people jump back in? Will this just be a bull trap created by premature monetary policy? Did Tiff fuck up the last raise up by being too dovish? Didn’t he wimp out? Or was it part of the plan to devalue the dollar a little instead of destroying the real estate market? I have no idea what’s going on right now. Will he have to back peddle and raise rates another 75-100bps to make a point?

One thing I do know is that there are many people that are coming up for renewal of their mortgage in the next 12-18 months. These are mortgage that were originally taken out as 1-3 year mortgages at rates between 0.5% and 3%. Now they are all looking down the barrel of 5-6% interest rate on renewal and possibly even higher. US 30 year fixed mortgages are just shy of 7% this week.

In Toronto and Vancouver that could be a gigantic pill to swallow for many with average priced homes. If you have a million dollar mortgage which isn’t out of the ordinary in these cities, your payments could eat you alive. The difference on these monthly payments are enough to force many to sell. It’s one thing for your mortgage to go up $300-500 per month. It’s not easy, but there are many things that most could rearrange or cut out completely in order to make up this shortfall. But these people are looking more in the $2000 or more range. Per month. This is much harder to find on a regular basis.

If you are smart and you are already worried about this, if you are thinking that there is a good chance that by the time you renew your mortgage that rates could still be at today’s levels or possibly higher. You can’t or maybe you don’t want to spend that kind of money every month to keep your fucking house, then you have some serious thinking to do and some serious decisions to make. Now. If you think that prices on homes will continue to drop, maybe now would be a good time to sell.

There are a lot of people that will have to get used to the idea of renting.

Maybe forever.