No Renewal For You

Steve Saretsky -

Desjardins is joining a growing chorus of housing bears, calling for further price declines in the nations housing market this year. The bank is now calling for a 25% drop from peak to trough in the average sales price nationally. Keep in mind the average sales price is skewed predominantly by the GTA, and a change in the composition of sold houses. In other words, if fewer luxury homes are sold it will naturally lower the average sales price.

Again, as we’ve talked about before, price predictions aren’t worth the paper they’re written on, what’s more important are the sentiment indicators. People are really negative about Real Estate, something we haven’t seen in a long time. Let’s not forget RBC’s recent call for the steepest correction in 40 years. It’s not hard to bump into a housing bear these days, everyone is on the same side of the boat.

There’s no sake in being a contrarian for contrarians sake, it’s hard not to see prices falling further, rising interest rates, massive debts, hawkish central bank, etc, etc. But markets also tend to do the opposite of what everyone thinks. Remember the pandemic and the mortgage deferral cliff?

Not prepared to call a turn here but it’s amusing to see the nations largest banks dog pile on top of their own collateral.

On the ground things are pretty weak here. Greater Vancouver home sales at 22 year lows in the month of July. Comparable homes are selling anywhere from 10-20% lower than peak valuations back in February. The suburbs continue to be caught in the eye of the storm. However, if this bear market is going to continue inventory needs to pick up. The total number of homes for sale is actually DOWN from last year. Yes, there are fewer houses on the market today than this time a year ago.

An interesting stat from the Bank of Canada probably explains part of it. Of the 65% of Canadian homeowners, 35% of them own their primary residences free and clear, no mortgage.  The only problem is this doesn’t account for investment properties which are definitely more levered. It is always the small Mom & Pop investor that gets squeezed first, 2008 was a good reminder of this. There are a few areas of risk worth watching moving forward.

Also, in case you missed it national housing data dropped today. The national benchmark home price index dropped 1.7% month over month, now down 9% from peak pricing in March. This will go down as the steepest decline since the data series was published in 2005. No bueno.

1. Pre-sale buyers who need to close in the months ahead. There will be some who get caught, unable to qualify at a mortgage stress test that suddenly sits at 7%. Good luck assigning a unit in an illiquid resale market.

2. Borrowers using private money or MICs (Mortgage Investment Corps) that are unable to renew or refinance these bullet loans.

An interesting note from the always insightful Daniel Vyner, Principal of a Toronto-based boutique mortgage firm, “witnessing a frightening quantity of private mortgage borrowers facing non-renewals for mortgages funded at maximum ‘loan-to-values’ at ‘market peak values’ that are now ‘un-refinancable’ as a result of lower ‘present values’ & ‘loan-to-value’ reductions.

In simpler terms, private money was 6% last year and is now 10%. Home values have dropped so lenders that do offer to renew not only want a higher rate of interest but will likely want the borrower to kick in more equity to get loan to value ratios back in order.

If you levered to the gills speculating on higher home prices you’re about to learn a lesson. If you’re a homeowner with a modest fixed rate mortgage then nothing to worry about, keep paying your mortgage and enjoy your house.

Three Things I’m Watching:

1. Desjardins revises forecast, calls for 25% decline in average sales price. (Source: Desjardins)

2. Total inventory for sale in Greater Vancouver is actually DOWN from last year. (Source: The Saretsky Report)

3. Average GTA condo rents up 8% or $200/month in past two months, up 19% year-over-year. (Source: Urbanation)

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