The crushing blow

We’re not finished with Paradise yet. Two days ago I asked if what happened in a Brampton field was an outlier, or a harbinger.

There’s no debate. This is the path to property perdition. We’re so not done yet.

Realtor and stats freak Scott Ingram figures Toronto detached home prices have now rolled back 13 months (to October of 21, when we were young and naïve). Condos are priced at 10 months ago. But all of this is just prelude.

In the next 90 days, chirps crusty mortgage broker Ron Butler, “we will read and watch posts and videos from all kinds of RE agents and mortgage salespeople promoting the concept that in Spring 2023 the Canadian real estate market will bounce back and surge in prices and activity.” But don’t believe what you see on Twitter, Insta, FB or TikTok. “The places where these posts are created,” he says, “shall become known as Hopium Dens.”

In short, there’s no reason to think interest rates are going down in 2023 (not after today’s inflation reading). No reason buyers will suddenly qualify to borrow enough. No change in the stress test (we got that confirmation last week). No sales surge. No price increases. No bidding wars, bully offers or blind auctions. It doesn’t matter a whit how many ‘special reports’ the humpers at Re/Max or Royal LePage churn out or how mindlessly the MSM parrot their price predictions, facts are facts. And they’re brutal.

On Wednesday the Ontario Real Estate Association’s poll found almost two-thirds (64%) of people in the country’s richest province are spending more than 30% of the household income on housing – long considered the threshold of affordability. Is life harder and more costly than it was two years ago? You bet, say 95%. And yet among those who don’t own real estate, 70% state they’re horny for some. Amazing.

(The realtors are urging more financial aid for newbie buyers, a dumbed-down stress test and 30-year insured mortgages. No ponies, yet.)

But wait. This is just foreplay to the consummation knockout from the adults at RBC. It is truly rare to read something like this from a financial institution, especially the largest bank in the land. Its latest affordability report (released yesterday) paints a picture of a country which has committed real estate suicide, for which there is only one cure – a price plunge.

Never, says the bank, ever, has it been more difficult to buy a house. Not even in the late 1980s, which turned into the Great Correction of the early 90s – and delivered a 32% haircut to the market. This time a hike in interest rates atop the pandemic bloat in valuations is far worse.

“The spike in interest rates since March served a crushing blow in parts of the country,” the economists say. “To qualify for a mortgage on the purchase of a typical home (at the benchmark price) in the Vancouver area a buyer needed to earn a minimum of $200,000 annually in the third quarter of 2021. A year later, the qualifying income had soared 34% to an astounding $268,000. In the Toronto area, it was $240,000—a 29% increase. What was already a very tough hurdle to clear is now nearly impossible for many potential purchasers. No wonder homebuyer demand has plummeted since the Bank of Canada initiated its rate hike campaign.”

Source: RBC Economics, CREA

This means only wealthy people, or the highest-income earners (in the 50%+ tax bracket) can afford homes unless they’re trading up. Across Canada it takes not 30% of income, but 62.7% to service a mortgage, with a hefty 25% down payment. That’s up 14.5% points in a year – the most on record. In Toronto the number soars to 85.2%. In Vancouver it’s an utterly ridiculous 95.8%. “Owning a home has never been so unaffordable anywhere in Canada ever—and probably most places around the world,” says the bank.

And it’s everywhere. In Halifax, for example, household income needs to be 44% higher than one year ago to buy the same house at current mortgage rates. And how many people in NS (or anywhere else) got a 40% pay increase in 2022? Exactly.

The only solution is the obvious one, given that the cost of money will stay roughly where it is. We need “a widespread price decline” says RBC. A market bottom will not start forming until the Spring (maybe), and then, “It will likely take years to fully reverse the tremendous deterioration that took place since 2021.”

Prices are down 12% nationally and 25% in the GTA, with 30% drops in the Fraser Valley and large hunks of the 905. The Maritimes are cooling fast, as it Montreal. The bank says another 14% reduction is coming before any market stability emerges. (Or a lot more.)

So, back to Brampton. Yes, it is a harbinger. As are the thousands of condos that will not close in the next few months.

Yes, buyers were foolish. Yup, too many people opted for the cheapest VRM rate around so they could buy maximum house. Of course, realtors were giant pimps for voracious, carnivorous sellers. FOMO turned out to be a pandemic on its own, spreading aggressively among the masses devoid of the precious GreaterFool Blog Vaccine.

There is only one outcome now. Bend over.

About the picture: “I have been reading your blog since 2010,” writes |Cindy, “and I was fortunate enough to get free tickets to see you speak while you were in Vancouver. Here is a picture of my labradoodle, Blossom, and her “most famous dog in the neighborhood“ friend Koda, in the trails. Have a wonderful holiday.”