“It’s like at Gamestop”: Mortgage expert on the risk of a home correction

According to one of the country’s best-known mortgage experts, prices in the red-hot Canadian real estate markets could face a “significant” correction given the extreme valuation and political uncertainty at the start of the new year.

Rob McLister, a self-proclaimed “rate watcher” and founder of RateSpy.com, said the Bank of Canada’s plan to start rate hikes next year was only one – albeit the most important – factor in what he believes is risky outlook creates for housing in 2022.

He cited an analysis released this week by the National Bank’s Economics and Strategy team that showed that the total value of Canada’s real estate wealth was roughly five times national disposable income for the second quarter of this year, compared to the 300 percent average for the recent rate hike cycles Bank of Canada.

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“Almost no other country in the world (compared to this ratio),” McLister said in an interview on Wednesday. “If you get that all-important leg on the table – interest rates – that will be kicked out next year, you may combine it with further regulatory tightening and a higher potential mortgage rate that raises many questions.” Real estate next year. “

The prospect of regulatory adjustments in the face of soaring house prices was put back on the table this week when Financial Institutions Superintendent Peter Routledge warned of the “slightly more fragile” state of household credit as Canadians built up debt to get more in the country Housing market.

Routledge specifically cited the imminent introduction of new capital requirements for banks under the Basel III protocol and urged the public to review the outcome of the annual review of the minimum interest rate by the Office of the Superintendent of Financial Institutions (broadly known as the mortgage stress test) in the coming weeks.

Currently, OSFI requires homebuyers who pay at least 20 percent upfront to demonstrate that they can service their mortgage obligations at their contract rate plus two percent or 5.25 percent, whichever is greater. The same requirements apply to insured borrowers (who deposit less than 20 percent upfront) under the stress test, which is the responsibility of the finance department.

Routledge also expressed caution in his speech about using Home Equity Lines of Credit (HELOCs) combined with mortgages. HELOCs allow homeowners to borrow up to 65 percent of the value of their home. In combination with a mortgage, this limit increases to 80 percent. Routledge said the combined structures make it more difficult to track risk on lenders’ loan books.

McLister said it is at a time like the present, when concerns about property market stability are mounting, that regulators and policymakers may be tempted to make “small policy adjustments” and that HELOCs may be targeted in the New Year To cool off the heat, home sales last hit a record in October in Calgary, while the average sales price climbed to an all-time high in the Greater Toronto Area last month.

“If you’re sitting on a house that’s up $ 500,000 in value, that’s potentially five 20 percent down payments on five other houses if you pick the right lender,” McLister said. “The point is, people are taking their new equity and reallocating it in the real estate market because it is one of the safest investments they can make with no loss.”

However, this notion of residential real estate as a surefire way to increase wealth was refuted this week by a top bank of Canada official. In a speech Tuesday, Deputy Governor Paul Beaudry raised the alarm about the “sudden influx of investors” that have accelerated home price growth, warning that the trend could lead to an eventual correction.

In fact, McLister outlined that prospect in his interview, citing the figurehead of this year’s so-called meme stock rally as an example of what can happen when a frenzy subsides.

“I think the challenge is to see investors with multiple properties,” he said, it snows a little, and then you see how individuals might take some money off the table … Ratings are extreme and we’ve seen how extreme valuations around the world in all sorts of different markets have been significantly corrected. “

“It’s like any other asset. You know, Gamestop goes up to $ 300 and that corrects itself very quickly because the prices are completely detached.”

While McLister said he was concerned about the outlook for home prices over the next year, he forecast no disaster. And for one simple reason: buyers still need a roof over their heads, which is not cheap.

“The thing is, people have to live somewhere. And that’s why it’s really hard to say, ‘Okay, prices are just stupid, I’m going to sell.’ Where do you want to go? What, do you want to rent? The rents are (also) high. “

And regardless of the scale, concerns about a possible correction are not being widely expressed.

Dennis Mitchell, Starlight Capital’s chief executive and chief investment officer, has doubts about the chances of a sharp drop in home prices.

In an interview on Thursday, he cited the labor market as the main reason he is more confident about the stability of house prices despite the prospect of higher interest rates over the next year. He noted the recovery since the darkest days of the pandemic, when unemployment improved from nearly 14 percent in mid-2020 to 6.7 percent in October and wage growth picked up again.

“If the cost of servicing your mortgage is increasing by $ 100 a month and your wages are increasing by $ 300 a month, isn’t that the recipe for a home fix, right?

“Are we going to see the gains for the past two years? Absolutely not. … but for a clear correction you need a considerable interruption of work. “

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