Real Estate Pain Is Showing Up in an Obscure Investment Product
An obscure investment product used to finance risky real estate projects is facing unprecedented stress as borrowers struggle to repay loans tied to commercial property ventures.
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An obscure investment product used to finance risky real estate projects is facing unprecedented stress as borrowers struggle to repay loans tied to commercial property ventures.
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Aug 17, 2017
I would argue one of the most closely-watched asset classes is real estate. For most of us, it is our biggest holding and often the most emotional one. Real estate prices in Canada have continued to climb from 2000-2016, according to The Fraser Institute, who says there is a very logical reason for it.
Lower interest rates and rising incomes more than doubled the amount Canadians can borrow for a home during that time period. Falling rates between 2000 and 2016 went from seven per cent to 2.7 per cent and rising incomes have resulted in increased borrowing power, the maximum size of a mortgage homebuyers can qualify for, by 53 per cent. During the same period, rising incomes were also up a nominal 53 per cent. Put the two together – falling rates, and rising incomes – Canadians’ mortgage borrowing power is up by a staggering 126 per cent.
Across the country in major urban areas, Calgary saw the greatest increase in mortgage-borrowing power at (161 per cent), more than Vancouver (118 per cent), Montreal (115 per cent) and Toronto (100 per cent).
In simple terms, the Fraser Institute highlights this increase in borrowing power means that an average Canadian family, dedicating the same share of their income to monthly mortgage payments, can afford a mortgage that’s more than twice as big now as it would have been in 2000.
Given the low interest rates and rising income levels, homeowners have been able to bid up the price of homes — and with limited inventory, home prices have escalated.
The slowdown now apparent in both B.C. and Ontario where provincial governments have put policies in place to take gently deflate the forming bubble appears to be working. Toronto Real Estate Board data released to realtors and viewed by BNN shows sales in the Greater Toronto area, for example, plunged 35 per cent in the first half of August.
And finally, there is the knock-on effect. Given the rise in real estate prices due to lower rates, rising incomes and increased mortgage power, you can’t help but wonder what happens when one leg of this three legged stool reverses course.
In 2017, mortgage rates have begun creeping higher, home sales have slowed for four months while employment levels nationally have been holding steady the same can't be said the for the leader of the pack of mortgage-borrowing power, Calgary, as the province still struggles with the energy downturn.
As the saying goes, "buyer beware" the real estate landscape is shifting.