He said that at a mortgage rate of 5.5 percent, payment goes up 63.5 percent. At 7.5 percent, payment more than doubles, Major noted.
“I don’t think mortgage rates are going to 7.5 percent, but they could easily go back to 3.5 percent,” he said. “Could they go to 5.5 percent? That would mean someone paying $3,000 per month now will have to cough up $4,905 per month on renewal.”
Major said that what worries him are Canadians currently “stretching” to buy homes at 1.5 percent mortgages.
“What’s going to happen in five years if interest rates are 3.5 or 4.5 or 5.5 percent?” he asked. “They’re going to have to pay a lot more just to maintain their houses.”
Meanwhile, a lot of aspiring buyers will not be able to afford mortgages “if interest rates go to 5.5 percent, which is not that far out of reality”.
“There are going to be no buyers at the current prices,” he said. “Nobody will be able to afford anything at the current prices.”
What’s going to happen next is that “people will just sit on their wallets”.
“If you can’t afford your mortgage payments, nobody else is going to be able to buy that property,” Major said.
This then “creates a downward pressure on prices when people need to sell but there are no buyers”.
“If the average mortgage rate gets to 5.5 percent in Canada in five years, we could see house prices fall 40 percent,” Major said.
In some hot markets like Vancouver and the rest of Lower Mainland of B.C., resulting house prices could be “half of what they are now”.
Major noted that Canadian housing is more overvalued than U.S. properties were before the 2008 market collapse, which cut American home prices by around 34 percent.
“We could see a bigger housing price correction than what the U.S. experienced,” he said. “If U.S. housing fell 34 percent, how much could Canadian housing fall?”
The Bank of Canada dropped its interest-setting rate to 0.25 percent on March 27, 2020 to ease the impact of the COVID-19 pandemic on the economy.
The central bank has maintained the rate, which is the lowest, and indicated that it will stay at that level until 2023.
However, Bank of Canada governor Tiff Macklem has observed “excess exuberance” in the country’s housing market.
“What we get worried about is when we start to see extrapolated expectations, when we start to see people expecting the kind of unsustainable price increases we’ve seen recently go on indefinitely,” Macklem said on February 24 at a meeting with chambers of commerce in Edmonton and Calgary.
But Macklem also said that the market, at the time, was still a “long way from where we were in 2016-2017 when things were really hot”.
In March 2021, the market in Metro Vancouver got even hotter.
The Real Estate Board of Greater Vancouver has reported that March 2021 sales were the “highest monthly sales total ever recorded in the region”.
A total of 5,708 homes sold last month, a 126.1 percent increase from the 2,524 sales in March 2020.
Last month’s transactions also represented a 53.2 percent increase from the 3,727 homes sold in February 2021.
Home buyers are subject to a mortgage stress test in which they have to qualify for a higher rate.
Major said that while this stress test offers “protection”, he doubts whether it’s enough.
“One of the big trips with mortgages and renewing them is, what if your house goes down in value in five years?” he said. “Is the bank going to renew at the same rate if the amount you owe is more than the house is now worth? That’s potentially challenging.”
Major noted talk about the anticipated easing of COVID-19 restrictions, which will open the doors again to foreign buyers of Canadian property.
“You hear all these buyers are coming from Hong Kong and that might be true. But is it enough to…keep inflating the housing prices here? I’m skeptical that it is.”
Major noted that there is a saying that goes, “never catch a falling knife”.
“If you can buy for less in six months’ time, you’ll wait six months,” Major said. “So that’s the same way for Canadians and people coming from wherever else in the world: they’re going to wait to buy if prices start to go down.”
