50-60% of all Canadian mortgages are set to reset between this year and next.
Most of these mortgages are fixed rate (75%), and most fixed rate mortgages in Canada are 5 year mortgages, meaning that most of them will reset from as little as less than 1-2% to about 5.5%.
The peak average house price in Canada was about $820k around late 2020 to 2022.
The median household income in Canada is about 70k. The top marginal tax rate in most of Canada is nearly 50% between federal and provincial taxes, so people earning 70k will not actually earn anywhere near 70k. Most people don't pay 50% on their last dollar, but taxes in Canada are still significant at that income level.
In past crises, the federal government allowed people to amortize their home over 35 or 40 years, but in a rising rate environment (or in this case a risen rate environment) interest costs, not principal costs, dominate the monthly payment.
This implies a much higher risk moving forward for most mortgages. This has a couple impacts. First, some people won't be able to renew at the new rate, so they will be forced to sell their homes under "power of sale" from the bank, which will cause supply to rise and prices to fall. Second, higher risk means mortgage rates are likely to rise, since the banks need to price in an increased likelihood that the borrower will default.
Non bank lenders (the so-called shadow banking system) face increased risks because they tend to get non-prime borrowers, and so will get more defaults. Some industry watchers allege this is already happening.
Housing makes up more of the Canadian economy than manufacturing at this point and has been a rising amount for 15 years. Much of the remainder is directly reliant on housing sector such as banking.
Many mortgages are insured so the banks won't directly pay the cost of the risks they took. The main insurer is CMHC, which is backstopped by the federal government. there are trillions of dollars of mortgages in Canada. There could be a period of higher taxes or increased borrowing by the federal government if a significant number of defaults occur.
One thing that a lot of analysts end up doing is they focus on the housing industry as if it is buying a gallon of housing. They seem to ignore the processes required to actually get housing into the hands of an individual or an investor. if mortgage payments are approaching 3 to 4,000 per month, then this idea that you can just import more people because absurd because people don't migrate to Canada because they're already super rich, so they aren't going to likely have $4,000 per month to pay, especially if most of that $4,000 per month is just going to interest. There are the stories of entire families who live in one million dollar house, but I suspect that if house prices are dropping and the amount of mortgage payments that are going towards principles are also dropping, that route will become considerably less attractive.
Another issue is the effect of all this on the greater economy. If you could get a place to live for $100 a month, then normal people could easily work a minimum wage job and support having a place to live. If, by contrast, you need three to $4,000 per month for a mortgage or rent, then you need to be demanding significantly more from your employers.
It is an established fact that Canada has been in a productivity depression for several years now, with per capita productivity flatlining and the only reason Canadian GDP is growing is because of overwhelming immigration. In this situation, individuals can't realistically ask for more money, because they aren't producing more stuff.
All of this put together seems to imply that there's going to be a very painful period for Canadians and for Canada as a whole. Some reports are suggesting that immigration is already net negative because people come to Canada expecting to get rich, and they discover that they can't even afford basic necessities. With shelter going up precipitously this year and the next, the as well as knock-on effects from everything that we discussed, it seems very likely that the productivity depression will become an actual depression as mobile individuals such as recent immigrants choose to go somewhere with better opportunities, leaving the country with unacceptably high housing costs that tend to be sticky, a flatlined per capita productivity, and a shrinking population
Most of these mortgages are fixed rate (75%), and most fixed rate mortgages in Canada are 5 year mortgages, meaning that most of them will reset from as little as less than 1-2% to about 5.5%.
The peak average house price in Canada was about $820k around late 2020 to 2022.
The median household income in Canada is about 70k. The top marginal tax rate in most of Canada is nearly 50% between federal and provincial taxes, so people earning 70k will not actually earn anywhere near 70k. Most people don't pay 50% on their last dollar, but taxes in Canada are still significant at that income level.
In past crises, the federal government allowed people to amortize their home over 35 or 40 years, but in a rising rate environment (or in this case a risen rate environment) interest costs, not principal costs, dominate the monthly payment.
This implies a much higher risk moving forward for most mortgages. This has a couple impacts. First, some people won't be able to renew at the new rate, so they will be forced to sell their homes under "power of sale" from the bank, which will cause supply to rise and prices to fall. Second, higher risk means mortgage rates are likely to rise, since the banks need to price in an increased likelihood that the borrower will default.
Non bank lenders (the so-called shadow banking system) face increased risks because they tend to get non-prime borrowers, and so will get more defaults. Some industry watchers allege this is already happening.
Housing makes up more of the Canadian economy than manufacturing at this point and has been a rising amount for 15 years. Much of the remainder is directly reliant on housing sector such as banking.
Many mortgages are insured so the banks won't directly pay the cost of the risks they took. The main insurer is CMHC, which is backstopped by the federal government. there are trillions of dollars of mortgages in Canada. There could be a period of higher taxes or increased borrowing by the federal government if a significant number of defaults occur.
One thing that a lot of analysts end up doing is they focus on the housing industry as if it is buying a gallon of housing. They seem to ignore the processes required to actually get housing into the hands of an individual or an investor. if mortgage payments are approaching 3 to 4,000 per month, then this idea that you can just import more people because absurd because people don't migrate to Canada because they're already super rich, so they aren't going to likely have $4,000 per month to pay, especially if most of that $4,000 per month is just going to interest. There are the stories of entire families who live in one million dollar house, but I suspect that if house prices are dropping and the amount of mortgage payments that are going towards principles are also dropping, that route will become considerably less attractive.
Another issue is the effect of all this on the greater economy. If you could get a place to live for $100 a month, then normal people could easily work a minimum wage job and support having a place to live. If, by contrast, you need three to $4,000 per month for a mortgage or rent, then you need to be demanding significantly more from your employers.
It is an established fact that Canada has been in a productivity depression for several years now, with per capita productivity flatlining and the only reason Canadian GDP is growing is because of overwhelming immigration. In this situation, individuals can't realistically ask for more money, because they aren't producing more stuff.
All of this put together seems to imply that there's going to be a very painful period for Canadians and for Canada as a whole. Some reports are suggesting that immigration is already net negative because people come to Canada expecting to get rich, and they discover that they can't even afford basic necessities. With shelter going up precipitously this year and the next, the as well as knock-on effects from everything that we discussed, it seems very likely that the productivity depression will become an actual depression as mobile individuals such as recent immigrants choose to go somewhere with better opportunities, leaving the country with unacceptably high housing costs that tend to be sticky, a flatlined per capita productivity, and a shrinking population
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