Young Canadians are holding fast to the dream of buying a home, even as overall rates of ownership are falling sharply, according to a new poll released by Scotiabank Tuesday.
The polling shows a steep decline in young homeowners over the past three years as housing unaffordability issues dogged would-be buyers. Some 26 per cent of Canadians aged 18 to 34 own a home today, down from 47 per cent in 2021, according to the poll.
At the same time, 29 per cent of respondents in that age group reported they were living at home with parents or family, up nine percentage points from three years ago. The number of renters was similarly higher among youth, up to 43 per cent from 29 per cent in 2021.
Not only that, but it sounds like homebuilders have been decreasing housing starts for several years, which seems counterintuitive if one has high housing prices.
https://www.reuters.com/world/americas/canada-homebuilding-down-third-year-housing-agency-predicts-2024-04-04/
Here’s my off-the-cuff understanding of the situation. I have not been closely following it.
In the wake of the global financial crisis, it looks like Canada cranked the central bank’s interest rate way down.
Shortly after Canada started bringing them back up, COVID-19 hit, and Canada slammed rates back down again. It wasn’t until inflation started to rapidly rise in mid-2022 that Canada started bringing them back up, at which point, Canada had had low interest rates for over a decade.
https://tradingeconomics.com/canada/interest-rate
My understanding is that one effect of running low interest rates is to create asset price bubbles. It’s cheap to borrow money, so people borrow a lot of money and dump a lot of it into housing, which blows the price of housing way up.
This has led to what is believed to be a housing price bubble considerably worse than the one that the US hit:
https://en.wikipedia.org/wiki/Canadian_property_bubble
This happened because it was cheap to borrow a lot of money under Canadian policy, and so what people did – looking at the rapid increase in Canadian housing prices – was to borrow a lot of money and buy housing with the expectation that it would continue to rise, and that by doing so with a lot of borrowed money, they’d increase their gains:
With Canada finally bringing interest rates up, house builders – expecting that they’re going to have a hard time selling houses – are having a hard time borrowing money to build more houses, so they pulled back on new construction. At that point, you have a lot of people with borrowed money that have soaked up a lot of housing, expecting it to continue to rise.
So I’d expect Canadian house prices to begin falling. When that happens, suddenly that investment in housing that seems like a really great idea because you’re using borrowed money to increase gains becomes a really bad idea, and you want to get out. But…you can’t sell that housing to anyone. So you potentially have a lot of people who want to dump housing all at once, which causes a bubble to pop.
Normally, when a buyer gets a mortgage, they have to make a down payment, though in the runup to the global financial crisis, a lot of US mortgage lenders were issuing a lot of mortgages with no money down. The purpose of this is to shield the lender from risk (and reduces interest rates from the borrower). Someone with a mortgage has $E equity in a house, the part that they own, and then $M that they borrowed from the bank. If someone defaults on their mortgage, because the house was pledged as collateral, then the lender can seize the house and sell it on the market to recover their $M, with their $M getting priority over the borrower recovering their $E.
Normally, that down payment is chosen by a mortgage lender large enough that even if house prices fluctuate and the price drops shortly after sale, the money can be recovered by the lender, so the risk is mostly on the borrower.
However, if house prices rapidly collapse far enough, then it may be that a house price isn’t high enough for a lender to recover the money they lent. That is, after sale prices go “underwater”, such that the borrower has lost all their equity and then the lender can’t even recover their loan if they seize the house and sell it, then the lender faces risk that the borrower will simply default on the mortgage, and the lender will not be able to fully recover the money they lent on the house.
That can lead to mass defaults by borrowers, which is what happened in a number of places in the US when housing prices rapidly dropped, which led to houses being seized and placed on the market, which further drove down housing prices.
My vague recollection – and I have not followed the Canadian housing situation closely; this is going from my memory of comparative housing policy back around the global financial crisis – is that Canadian mortgages are all recourse. In a minority – but important minority – of US states, mortgages are non-recourse (at least on the primary mortgage; this doesn’t apply to secondary mortgages, HELOCs, etc, at least in California, by my way of recollection). What that refers to is whether the lender has recourse if a buyer defaults on their mortgage. That is, can they try to seize other personal assets, garnish income, have some other forms of trying to recover their money in a default.
That will probably tend to make it less-likely for Canadians to walk away from debts…but I don’t think that it makes lenders immune. That is, if someone files for personal bankruptcy – which might be a good idea if they don’t have a lot of assets outside the house and they have borrowed an enormous amount to buy a house that is worth far less than they paid for it – I’d guess that the lender probably has no recourse, though I haven’t gone researching Canadian law on the matter. Or if someone is an overseas buyer – something that Canada has recently severely restricted – it may be hard to go after their other assets to recover loss if they default even if they don’t declare bankruptcy.
In general, Canada’s less-borrower-friendly, more-lender-friendly laws probably means that the Canadian banking system won’t get into as much risk of banks getting clobbered as the US, even if a bubble pops. But that doesn’t mean that people who buy houses can’t be considerably-worse-off than they otherwise would have been.
Another factor is that in the US, the most-common type of mortgage is a 30-year fixed-rate mortgage. As interest rates fluctuate, they don’t affect people who already have a mortgage rate locked in. That does mean that if interest rates rise, they may not be able to easily move; labor mobility will take a hit, which isn’t good. But they can probably continue to pay the mortgage on their existing home, as long as their income continues. Canadian borrowers, as I understand it, normally need to refinance their mortgage each five years, so their mortgage payments are affected by current interest rates. If interest rates rise, as they have their payments will also rise starting at some point in the next five years. Canadian interest rates have recently risen quite considerably.
One cause of high housing prices is if there just isn’t enough housing supply out there at all, like, construction can be constrained by zoning laws and such. Another is that the supply of housing is out there, but people are determined to purchase rather than renting. Potentially each is true to some degree, but a way to determine whether people are irrationally bent on purchasing is to look at the price-to-rent ratio. This, as a rule of thumb, is generally expected to hover in a vaguely-fixed range.
kagis for Canadian price-to-rent ratio data
https://www.zoocasa.com/blog/price-to-rent-ratios-across-canada/
https://www.zoocasa.com/blog/wp-content/uploads/2024/05/Townhouse-downpayment-1-1-768x1516.png
Based on that, the price-to-rent ratios in almost all of Canada are relatively high for detached homes. That means that at least part of the situation is people buying when they probably should be renting in terms of expected financial return. Unless what a Canadian is looking to live in is a unit in a multiunit building, I expect that it’s probably a good move for a Canadian to rent right now, avoid exposure to the real estate market. One would want to have their assets in something other than equity in single-family home real estate, like stocks or bonds or suchlike.
The interest rates are already falling and most have weathered the storm. The pressure needed to pop the bubble is being relieved so I doubt it’s going to blow up. Rather I think we’ll see a long sideways movement.
Ah, the Canadian housing bubble Wikipedia article talks about some of the points I raised:
https://en.wikipedia.org/wiki/Canadian_property_bubble
That “snowball” is referring to a bubble popping. And this also mentions the five-year mortgage factor: