Peak purchasers in Canada are in for a difficult time as the real estate bubble bursts swiftly due to rising interest rates. According to the latest numbers released by the Canadian Real Estate Association (CREA), the national market peaked that year, in March. We calculated how much equity purchasers from that month would have accrued as of the present. Most people who bought a house at the pinnacle of the market last month are already underwater.
NEGATIVE EQUITY MORTGAGES AND LOAN-TO-VALUE RATIOS RATIOS
When the mortgage’s LTV is more than the property’s current value, the borrower is said to be “underwater.” In layman’s terms? In the event of default, the home’s worth wouldn’t be enough to pay out the mortgage. The situation is complicated for the lenders because they have no collateral for their loans. Canadian mortgage borrowers typically have large amounts of equity, leading to low loan-to-value (LTV) ratios.
A fee must be paid by underwater homeowners in order to sell their property. No matter what the value of the home used as collateral for the loan, they are still responsible for paying down the remaining balance. Lenders must make up the difference by providing additional funds. That doesn’t take into account any ancillary expenses associated with the sale (such as commissions for real estate agents, legal fees, moving charges, etc.).
Our focus today is on the markets where first-time peek purchasers would be at a significant disadvantage. In this case, we use the all-time high in the country, which occurred in March of 2022, just before rates of interest began to climb. The majority of our mortgages are high-ratio loans that require little to no down payment. Markets where the median price of a property is over $1 million often require a traditional mortgage down payment of at least 20%. Increased safety net for creditors and debtors during economic downturns.
INDICATIVE OF A NORMAL SUMMIT PURCHASER NEARLY 10% UNDERWATER ON CANADIAN PROPERTY
Since peaking in March, the price of a composite benchmark home has dropped significantly. In October, the average home’s price dropped to $735,400, a drop of 15.3% (-$132,900) from its peak. If they bought at the peak, a buyer who only put down the minimum would be 9.7 per cent ($71,100) in the red. To get out of the agreement, they would need to pay higher than they first put down.
When looking at the key indices, the majority of the Canadian real estate markets (55%) share the same boat. If the same trend seen in October continues into November, investors who bought into 75% of the major indexes would be in the red. Homebuyers in Ontario should anticipate spending up to six figures if they need to cover repairs on a property they’re purchasing.
When it comes to real estate, Ontario was once at the forefront, but now it’s at the bottom. The average buyer in Kitchener-Waterloo was $146,500 in the red in October. In second and third place, respectively, were Cambridge (-$140,000) and London-St. Thomas (-$137,000). Making six figures by selling a house in a small city at least an hour from Toronto sounds, to put it mildly, painful.
CANADA PROPERTY VALUES
A market’s lack of negative equity is no guarantee of success. Vancouver ($138,100), the Lower Mainland ($100,600), and the rest of British Columbia ($99,700) indexes would have the highest remaining equity. Even still, in March of 2022, the average home in those areas cost well over a million dollars. That means the bare minimum required for a down payment was $200,000. However, the amount of equity is less than what is required for a typical mortgage, therefore it is not necessarily a profit. That can create complications if you decide to switch mortgage lenders.
SOME CHEAPER MARKETS HAVE CONTINUED TO GROW AS CREDIT HAS BEEN MADE MORE AVAILABLE THERE
Despite the general trend downwards in the real estate market since March, not all major areas have experienced declines. Equity contributions increased in Prince Edward Island, Bancroft, and Newfoundland. All of these communities have median home prices that are less than $500,000, making them accessible to a wide range of buyers. It’s debatable whether it’s worth that much.
*Markets, where the composite benchmark price was over $1,000,000 in March 2022 just, weren’t eligible for high-proportion mortgages, and consequently required a 20% downpayment, leaving most of Canada’s peak real estate buyers underwater.
The only people who should be worried about a company with negative equity are the investors. Large mortgage companies rarely evict customers who are current on their payments. They are only interested in the interest payments, not the actual residence. Default is not a major problem if you want to stay in the house for 10 years or more.
The banks are safe too because the loans are typically guaranteed with only a modest down payment. It’s an inconvenience, but the borrower forked over a fat insurance premium to cover the bank. However, the borrower is still responsible for the entire balance.
If the investors’ business case shifts, they are in much more of a bind. Many would-be landlords chose negative equity investments with the expectation that future gains would cover initial outlays. Rising rents should assist, but interest rates are rising and equity is being eroded at an alarming rate. As a result, some investors may decide to cash out or double their bets.
Since investors accounted for a quarter to a third of the market, substantial losses are possible. Especially considering additional obstacles, such as international mortgage legislation and increasing interest rates. The Bank of Canada issued a warning about the increasing difficulty of navigating the current level of risk just yesterday. It won’t be a massive problem, but it also won’t be simple.
