This article was originally published in BIGerPockets Forum.
I wanted to share what’s going on in Canada because I believe everyone can learn from it, but I don’t think it’s being reported at all in the United States.
Interest rates in Canada are growing just as wildly as rates in the U.S., but we’re seeing unique negative consequences.
Mortgage financing is different
In Canada, we don’t have 30-year fixed mortgages. We have a fixed mortgage that amortizes over 30 years, but typically we’re only locked in for five years at most. After that period expires, you must renew at the current rate.
When that happens, people’s mortgage payments increase by about 60% in the worst-case scenario. Our housing prices are also ridiculously high.
We’re taking on adjustable-rate mortgages at a level you’ll never see in the United States. I don’t believe these punishments exist in America, at least not in the same way. An adjustable mortgage can eliminate these penalties if you default on your adjustable mortgage.
Adjustable-rate mortgages add more uncertainty
About one-third of all mortgages are adjustable. People with mortgages have their payments automatically increase with every increase in interest rates, and cash flow disappears entirely. I once went from $771 a month to $1,250 a month. Fortunately, I still have cash flow.
In some adjustable products, the payments stay the same, but the split of principal versus interest changes, and people are only paying interest and are now in a negative amortization position, and the amount they owe is actually increasing. not good!
People are losing money left and right
Since the peak, prices have fallen by 25% to 30%, with most of that occurring in 2022. The place will no longer be rated.
In the Kitchener/Waterloo market, for example, the average home sold for nearly $1 million in early 2022, nearly $200,000 more than the average list price. Two years later, the average list price remains fairly flat, but the average sales price is roughly equal to or slightly lower than the list price. Additionally, the number of homes sold fell by about half during this period.
People also can’t sell their homes easily because there’s a massive buildup of inventory, sellers’ expectations are still stuck at yesterday’s prices, and days on the market are at their peak.
I personally know people who have gone bankrupt, lost property, and lost six or seven figures of money.
People who purchased new construction a few years ago are unable to complete their purchase because they are now worth much less and cannot afford the payments. This is one of the greatest disasters. Over time, people are giving up the six-figure savings they made. Almost every few weeks, there are news reports of new construction homes being burned down, and sometimes entire neighborhoods being burned down.
We don’t fully know the backstory, but it wouldn’t be surprising if people were trying to wait for time to rebuild their homes.
final thoughts
Canada’s economic downturn has been largely felt in Ontario and British Columbia. These two provinces account for more than half of the population, so I think it’s only fair to write “Canadian Real Estate” in the title of the article. However, some people from smaller provinces have rightly pointed out to me that they are not seeing the kind of price drops I’m talking about. However, the country as a whole does feel the negative impact of not having a long-term fixed mortgage like in the U.S.
I decided to share this story because I believe anyone in the real estate world would find it interesting and gain something from it. On the other hand, this also presents some opportunities for creative real estate investors.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
