This is how Canada's housing correction begins
Kirk Marsh first noticed the mood start to turn in Vancouver’s housing market a year ago. As a real estate investor who buys homes and condos then fixes them up for resale, Marsh has an excellent vantage point on the market. Since giving up his old job in tech three years ago to flip real estate—“Sitting at a desk was killing me,” he says—Marsh has bought and sold six detached homes and condominiums across the B.C. Lower Mainland. “It’s not like TV shows where you see them making $100,000 or more each time, it’s just not like that,” he says. But he’s done well, always able to find buyers and come out ahead.
Or that’s how it used to be. “Today, everything has stalled,” he says.
While visiting open houses over the past year looking for his next flip, Marsh watched the frothing crowds and bidding wars steadily dwindle away. “There’s just nobody showing up at the open houses now,” he says. “Especially downtown. Usually you’d see a group of very aggressive people coming out.” But he’s also keenly aware of the slowdown because he’s trying to unload a renovated two-bedroom condo in New Westminster, just east of Vancouver. The unit, with an asking price of $569,000, had been sitting on the market for two months as of mid-December, with almost no interest.
Marsh is torn when it comes to the health of the market. On one hand, the strong local job market and inflow of new residents to the region lead him to believe the fundamentals remain strong for Vancouver real estate. But he also knows that Ottawa’s tighter mortgage rules, combined with relentlessly rising interest rates, means it’s getting harder for people to obtain the large mortgages necessary to get into the market: “I don’t know where the buyers are going to come from,” he admits. “And that worries me.”
He’s far from alone.The willingness of consumers to borrow and spend—on houses, cars, furniture, restaurants, you name it—has been Canada’s primary economic engine for more than a decade. After Canada emerged from the Great Recession relatively unscathed, we were the envy of the world. Thank households for that. When turmoil and uncertainty held back business investment and crushed exports, Canada’s economy continued to grow while unemployment fell. Thank households for that, too.
It was plain to see what fuelled this consumption: cheap debt. Interest rates spent most of the past two decades going down and were at or near four-alarm emergency lows since the Great Recession. Canadians took their cue and gorged on debt. We now owe $2.16 trillion in mortgage, credit card and other consumer debt—an 80 per cent jump from 2008, and an amount that now exceeds the value of the entire Canadian economy. Even Americans didn’t go that overboard during their housing bubble.
Now rates are rising, and many heavily indebted households are feeling crunched. In 2018, the Bank of Canada increased its benchmark rate three times to 1.75 per cent. Another two or three hikes are expected in 2019. For the first time in a quarter century, households are having to renew their mortgages at rates that are higher than when they first signed.
At the same time, the federal government has steadily tightened mortgage standards. Federally regulated lenders must put potential borrowers through stress tests, whether they’re applying for an insured or uninsured mortgage, to determine their ability to repay. The new mortgage rules have reduced the amount Canadians can afford to borrow by around 20 per cent, sending home sales tumbling across much of the country.
It’s a one-two punch that has shaken the foundations of the housing market, put an immediate dent in consumer spending and left economists and market observers wondering how deep the hit to the economy will be. “Maybe it’s just a moment and the market will rebound again like it has in the past, but maybe this is finally the perfect storm,” says Steve Saretsky, a Vancouver real estate agent. “I think we’re seeing the catalyst for a correction that everyone’s been talking about for 10 years.”
When the governor of the Bank of Canada stood to deliver a speech in Edmonton about his latest rate hike, the reception was frosty. While the goal of the hike was to cool an overheated economy, oil prices were sliding and households were already struggling to absorb a series of earlier increases. The governor stood firm: “It is not the bank’s job to be popular.”
While the current governor, Stephen Poloz, may share that conviction, the governor who delivered that speech was Gerald Bouey. The year was 1981, and in the span of just seven weeks, Bouey had cranked up rates seven times. His latest hike put the bank rate at a stunning 18.75 per cent. Yet Bouey wasn’t done. Rates would climb to 21 per cent as the bank strained to tame runaway inflation.
That era looms large in the minds of older Canadians. But a whole generation has grown up and entered the workforce and the house-hunting race never knowing a time when rates were above five per cent. The fact is that rates don’t have to rise to anywhere close to double-digit levels to create havoc with household finances, because households now carry so much more debt than they did then.
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