It. Has. Arrived. (Or is just about to…) A Canadian housing market crash. People have been predicting one for years, and between rampant inflation and the inevitable __ that we will walk through below, there’s nowhere left to go but down. With a crashing bang.
Besides, Canada is already the #1 country in the world…. In housing bubbles! So this Canada housing market crash is a slow unraveling of something we all knew was coming.
6 Reasons Canada is Set Up For a Spectacular Housing Crash in 2023
So…. Canada seems to have invented a perfect storm. Here are a few reasons:
1 – The “Canada Housing Bubble” Is Not a New Term.
Canada has arguably been in a housing bubble for decades at this point with only slight corrections along the way. If you’re an American, you may think you get it, but it’s really not the same. I remember buying my house in 2012 and everyone told me I was crazy because I was buying at the top of the bubble that was about to burst. This bubble’s been building since 1990. It felt like a bubble then, and it feels even more like one now.
2 – Canada’s Banning Foreign Property Purchases.
That’s right. The government is banning foreign property purchases starting in 2023 which will only ___. (link) It may not seem like a big effect, given that foreign buyers make up only about 3% of purchases, but shifts in supply and demand always have outweighed consequences.
When there’s a shortage of stock, prices rise quickly because you are wayy on the right side of the demand curve. But a 3% decrease in demand yields a greater than 3% drop in price. An easy example of this was the salaries in 2022 during the labor shortage. There was a 2% increase in retirement for ages 55 and over, but salaries shot up by over 10%!
Housing prices will do the same thing but backwards.
3 – Canadians Opted For Variable Rate Mortgages.
While a lot of people look at American and Canadian housing markets as veiled versions of one another, there are two major differences between Canada and the US, and they have to do with mortgages.
US has 30-year fixed rates, Canada does not.
Americans have government-insured 30-year fixed mortgage rates. That means that number is literally fixed for 30 years. Canada doesn’t have that. Even with a 30-year mortgage, your terms change every 5 years – meaning your mortgage rate gets updated.
Anyone in the US who has already bought a house with a fixed mortgage rate, will not be impacted by this rate hike no matter how long all this goes on. This makes a lot of people pretty content to stay put.
For Canadians – even if they’ve opted for a fixed rate, sometime in the next five years they’ll have to face reality. But also…
Canada has A LOT of variable mortgage rate holders.
Yep, 22%-33% of homeowners. And in the very near future, their mortgage payments will shoot way up. So even if a small chunk of these people all decide to sell at the same time, it will have a huge impact on home prices.
4 – Stress Tests and Trigger Rates
Most Canadian homeowners have hit their stress test limit when the variable rates hit around 5%. But the mortgage rates are still climbing. By going past the stress test limit, many homeowners may not be able to afford their mortgage payments and would be forced to sell soon.
Also, over half of variable rate borrowers (or about 13% of all mortgages) have hit their “trigger rate.” This means for people who opted to pay a fixed payment (which usually comes at a premium) will be forced to make additional payments to even put a chunk into their principal.
These borrowers are also likely at risk of not being able to make their payments.
5 – Mortgage Fraud
The data around Canadian mortgage fraud is not as transparent as other factors, but we do know there are people who fudge numbers to qualify for a mortgage. (I’m pretty sure I personally know a few people who obviously bought too much house.) All those people are likely in trouble now and will be motivated to sell.
6 – Canada’s Not Insulated From The World
The US and other countries are also teetering a market crash. The bubble seems to be held up by nothing but optimism, meanwhile:
- Rates are going up worldwide,
- Crypto is in panic mode,
- Central banks and even some countries are hoarding gold,
And everything else I’ve covered in We Haven’t Even Crashed Yet. (The Real Holdup Of The Next Market Crash.).
And while Canada is sometimes insulated from America’s (and the world’s) financial woes, all of these things could line up like dominoes for a spectacular downfall.
TL;DR – Canada Housing Market Crash
Analysts have been predicting a Canadian housing market crash for over a decade, but between inflation, raised interest rates, and a few other “perfect storm” factors, it’s now at our doorstep