While this is commonish sense, this news isn’t trustworthy without any evidence or numbers.
How much exposure is there, what order of magnitude of assets are at risk, what would a target for post-bubble prices be, how at risk is Canadian debt servicing, etc.
As far as I can see the risk is 2023 to 2026 sees fixed rate renewals happen from covid rates to current or elevated rates. Variable rates make up about 1/3 of mortgage debt and defaults/sales would already be priced in.
Let’s run the numbers for Ontario.
Avg mortgage last year (in June, the easiest number to pull from CREA website) was $829k, at 2.5%, which is $3713/mo or $44,555 annually. They do 5 years and renew at 6%, leaves $701k on 20 years for $4997/mo, 34% increase and $60k/year to service. The Bank can extend you by 5 years and reduce the payment to $4489/mo reducing the cost to $54k.
So the question is, can families who already bought homes find $10k annually to make up that shortfall? That will command supply of homes. This should be worse for 2021 and 2020 purchases, but they have a lower total mortgage.
The affordability calculators all suck because they’re based on the down payment, so we’ll do it ourselves. According to stat can, average after tax family income in 2021 was $99,100 (Table 11-10-0190-01, can’t link on mobile), with 32% of income on housing we’re looking at $2650/mo which is a $415k mortgage at 6%. At 50% they can do $4129 for a $650k. That’s feasible but not recommended. The CMHC calculator goes to 70% (seems farfetched to me)
So, 50% of couple-families can roughly afford $650k at current rates on after tax income, and the average family has about $10k additional exposure, that can probably lead to a 25% drop in prices. That’s if median families are buying and have the down payment ready.
This is all napkin math though and not using the full distribution of prices. If I were doing this professionally I’d have simulated pricing structures and rate increase schedules. But to me I don’t think this bubble is going to see houses drop to the 300s like they used to be.
Increasing supply to decrease prices is the best option, that should be a priority for all levels of government. It would also deflate the balloon but not catastrophically.
But to me I don’t think this bubble is going to see houses drop to the 300s like they used to be.
Is this a conclusion based on just direct impact, or did you consider the risk of people trying to bail out of a perceived-collapsing market in fear of an ever more challenging monthly payment?
I’d agree if you said it’d be difficult to even guess at the exact effects if people started panic-selling houses to unload on income properties to limit their risk - my own family was caught in that in the early '80s Calgary market and we’ve never recovered - but is there a nod to the potential for that slippage in your conclusions?
That’s a MASSIVE stretch for a typical family of 4 on your average income scenario, Once you factor in all the utils, maintenance… the $400 to $500/month property taxes, a $650/month car payment (an average family has a car payment)… and the incredibly high cost of food… they will be well over stretched at a 50%.
While this is commonish sense, this news isn’t trustworthy without any evidence or numbers.
How much exposure is there, what order of magnitude of assets are at risk, what would a target for post-bubble prices be, how at risk is Canadian debt servicing, etc.
As far as I can see the risk is 2023 to 2026 sees fixed rate renewals happen from covid rates to current or elevated rates. Variable rates make up about 1/3 of mortgage debt and defaults/sales would already be priced in.
Let’s run the numbers for Ontario.
Avg mortgage last year (in June, the easiest number to pull from CREA website) was $829k, at 2.5%, which is $3713/mo or $44,555 annually. They do 5 years and renew at 6%, leaves $701k on 20 years for $4997/mo, 34% increase and $60k/year to service. The Bank can extend you by 5 years and reduce the payment to $4489/mo reducing the cost to $54k.
So the question is, can families who already bought homes find $10k annually to make up that shortfall? That will command supply of homes. This should be worse for 2021 and 2020 purchases, but they have a lower total mortgage.
The affordability calculators all suck because they’re based on the down payment, so we’ll do it ourselves. According to stat can, average after tax family income in 2021 was $99,100 (Table 11-10-0190-01, can’t link on mobile), with 32% of income on housing we’re looking at $2650/mo which is a $415k mortgage at 6%. At 50% they can do $4129 for a $650k. That’s feasible but not recommended. The CMHC calculator goes to 70% (seems farfetched to me)
So, 50% of couple-families can roughly afford $650k at current rates on after tax income, and the average family has about $10k additional exposure, that can probably lead to a 25% drop in prices. That’s if median families are buying and have the down payment ready.
This is all napkin math though and not using the full distribution of prices. If I were doing this professionally I’d have simulated pricing structures and rate increase schedules. But to me I don’t think this bubble is going to see houses drop to the 300s like they used to be.
Increasing supply to decrease prices is the best option, that should be a priority for all levels of government. It would also deflate the balloon but not catastrophically.
Is this a conclusion based on just direct impact, or did you consider the risk of people trying to bail out of a perceived-collapsing market in fear of an ever more challenging monthly payment?
I’d agree if you said it’d be difficult to even guess at the exact effects if people started panic-selling houses to unload on income properties to limit their risk - my own family was caught in that in the early '80s Calgary market and we’ve never recovered - but is there a nod to the potential for that slippage in your conclusions?
I did not, no.
I’m just a guy with a spreadsheet and some extra break time I banked.
That’s a MASSIVE stretch for a typical family of 4 on your average income scenario, Once you factor in all the utils, maintenance… the $400 to $500/month property taxes, a $650/month car payment (an average family has a car payment)… and the incredibly high cost of food… they will be well over stretched at a 50%.
I think $4k a month can cover that, but it’s not comfortable. 3k on groceries seems quite high to me.
Plenty of big, big funds have massive exposure to short sellers
DRS GME to stop global financial crime
That’s true. My assumption was the bubble doesn’t pop unless people default, and what would cause that.
Flippers, investors, speculators, and banks aren’t really factored in here.
Certainly couldn’t be the global instability in housing markets