Do you remember when the Covid19 pandemic began?... Do you recall the lock-downs that virtually stopped the economy and forced most of the population to hunker down and wait a few months before solutions where implemented by the Federal and Provincial governments?
Well, that was 2020... or, at the time of writing this blog, 4 years ago.
Yet, for the most part, the real estate market, which had taken a wild turn a few years prior with multiple offers on virtually every piece of residential real estate being the norm inflated prices that, to this day, have held their ground in many areas. Buyers were battling out with each other and overbidding their offers to make sure they won the deal and the worst of it is that the banking system was more than pleased to lend them money based on these inflationary values.
From the buyer's point of view, this was occurring because the cost of leveraging their purchase was almost non-existent, with 1.5 to 2% mortgages made available to the markets for 5 year terms... Borrowing money was cheap and affordable and even governments got into the action, furthering the debt to the country.
Well here we are in 2024, with mortgage rates at 5 and 6%, a far cry from the 1.5 to 2% many people locked-into back in 2020... and those loans are now coming up for renewal... YIKES!
The graph above (which I pulled off my facebook wall) showcases the percentages of total mortgage loans coming up for renewal in the next 6 months, 1 year and 2 years... You will notice that most financial institutions average close to or more than a quarter of their entire loan output coming due in 2025. This represents more than 1.3 billion dollars in mortgage loans up for renewal from mid-May of 2025 to April 30th.
So what does this mean for the average homeowner? Say you bought a home in 2020 for $600,000 and you had the means to put down the minimum 20% to avoid insurance fees, you would have borrowed on a $480,000 mortgage which you typically would have amortized over 25 years and chosen a 5 year term at 2% if you were unlucky to get below that rate at the time... Under these conditions, your monthly payment should be around $2033, excluding all your property taxes of course... This represents a yearly payment of $24,396.
Next year (or at the end of your term), your mortgage balance should be $473,800. Assuming rates stay the same as they are today, you would be facing anything between 5 and 6%, so let's stay at 5% for demo purposes. Since you are 5 years into your loan, you would have 20 years left on your amortization. So with a balance of $473,800 @ 5% on 20 years, your new payment would be $3114, or $37,368 per year, hence $12,972 more per year than the amount you were paying! That's a 53% increase!!! Now, how many homeowners will get a 53% increase in salary by next year?... Add to that your property taxes, food prices which have surpassed the levels of "ridiculous", credit card debt, personal loans, car loans and leases, heating costs, etc... This is a a debt bubble that is about to burst!
I'm not looking to fear monger here, but you can imagine what could happen to the real estate market as many homeowners, who were confident that rates would remain low, never anticipated being stuck 5 years later to assume such a heavy debt load. The purchase of a home is, more often than not, a highly emotional decision and not much thought is put into possible future economic scenarios.
So between now and the end of 2025, I do anticipate a peaking of inventory of homes for sale, Canada wide, as homeowners who can't support their mortgage renewal will try to sell out for maximum profit and equity. When supply over-exceeds demand, prices drop... Only the early birds will get the worm, for those days are coming faster than anticipated and the word will get out there...
Although the federal government is looking to instigate new mortgage rules with its Central Mortgage and Housing Corporation (CMHC), to extend amortizations to 30 years, as a means of easing your monthly payouts, such a rule would simply extend the debt load through time. It may be helpful for certain borderline cases not to have to sell their homes, but will not have a major impact on those who simply can't afford to pay the extra 53%.
This puts a whole new meaning behind the old axiom: "Buyer Beware"... wouldn't you say?
Marc.
p.s.: Warning to those who started with a variable rate mortgage... Check with your bank if your payments have not changed since the rate increases. Your loan may have been subjected to an increase in amortization to compensate for these increases as a means to maintaining your monthly payment structure...
Credits to Wowa.ca for this amazing analysis.
Comments