What I'm worried about today...

More rate hikes to come.

With the Bank of Canada raising rates in October another 50bps and the promise of more hikes to come, the Canadian Real Estate industry and its experts are left reeling, trying to find themselves and their clients yields in Real Estate that are better than a typical 1 year GIC or an Israeli Bond.

Although this interest rate hike was 33% less than the market anticipated, it was still an outsized hike and will already be compounded on top of previous unfelt larger outsized hikes. I am sure that the BoC overshot their mark a long time ago.

In order for most deals to pencil out an inordinate amount of cash is necessary for any deals to move forward. There is no honest economists model on earth that would have accounted for rates to go from X to Y in such a short time span. No one had seen this coming. Many including me have egg on our faces. The Truth is that no one really knows what kind of an affect this will have on the Real Estate market. Of course Toronto and Vancouver will be hit hardest by this as their prices are furthest out of line with real wages and real wage growth. Most rate increases have not yet been felt in the market as many buyers have still been trying desperately to close homes with pre approvals still in place in the 4% range.

We have seen a flood of inventory in the Pre-Construction assignment market. To a point where a single agent I know has more than 10 assignment units in the same building.

We have seen new home and condo sales dive off of a cliff, down 96% and 89% respectively YoY in Toronto. We see similar numbers coming out of Vancouver. This is in large part because big developers with deep pockets have slammed on the brakes to wait for more certain times. New launches have all but disappeared. One thing we see coming down the pipe as a potential problem is if rates stay at this level, or higher, for a prolonged period of time we have the potential renewal crisis! Many "responsible” borrowers in major cities who have 35% -40% equity on $1 million+ homes with a guarantor who’s property value is also plunging while their stocks get decimated are not safe from much higher mortgage payments either. So much higher that they might be wiped out or forced to sell. Many will likely lose some or all of their equity if they try to hang on for too long. We hear stories of families moving into their own basement in order to be able to rent out the rest of the house to make ends meet.

There is no amount of inventory that can create a balanced market when we take into account the record pacing immigration that the Canadian government is pushing through. most of which will hope to live in 1 of 3or 4 major city centers.  

We have seen recently an attempt by the provincial and municipal governments to speed up the pace of the approvals process and further incentivize property developers and investor to add more inventory into the market. Unfortunately as is regularly the case, they have grossly missed the mark. Once again I am afraid that the targets that they set will not even come anywhere close.
There will be nothing short of giant hurdles to overcome for the Canadian Real Estate market in the months ahead. How many months is anybody’s guess.

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