A good friend has told me that her mortgage has come up for renewal and her monthly payments are going to almost double. The impact, not just for herself but for the tenant in her basement apartment who is not in a position to pay increased rent, will be enormous.
My friend is not alone in this predicament. This is happening across the country, although it is rarely talked about in the media.
How and why has this happened? Who is to blame? Is it the fault, as some suggest, of homeowners for not anticipating a rate hike and buying above their means. I don’t think so.
Owning your own home is part of the Canadian dream. For most of us it's one of the primary goals in life. Canadians want secure tenure – the knowledge that a landlord can’t arbitrarily raise the rent or evict them to open an Airbnb.
Yet between 2011 and 2023 home ownership fell by 2.5 per cent in Canada. Today only 66.5% of Canadian residences are owner occupied. To put that in perspective, 48 countries presently have home ownership rates higher than Canada.
The recent decrease in home ownership is particularly surprising given that, with the obvious exception of the last year, interest rates have for over a decade been on average the lowest in 50 years. You would have thought that would have led to a lot more Canadians choosing to become home owners. It hasn't, which I think, says a lot about the financial insecurity so many young Canadians have been experiencing in this era of precarious, contractual work. The decline in home ownership was most sharp (averaging 7.5%) in those under the age of 34.
But what about those who could afford to save the downpayment and buy a house? What choices were they making?
At present, fifty-one percent of new borrowers have chosen variable mortgages for which the rate is not locked in, but changes according to prime or overnight changes at the Bank of Canada. Looking at the chart below compiled from Ratehub data you can see why they made that decision.
First, the differences in monthly payments between the different categories are huge. Secondly, the risks really have not seemed great as interest rates remained stable between 2010 and 2021. These people did not see themselves as being reckless.
But then came the sucker punch. Since 2022, following the direction of the Federal Reserve in the US, the Bank of Canada has raised its overnight interest rate eight times. The rationale is that these actions were needed to fight growing inflation. Higher interest rates would limit people's borrowing. In turn, that would lead to less spending which means demand would go down and prices would fall.
Actually, that's a weak and phony argument. Inflation didn't rise because we, the consumers, were buying more things. The real problems lay elsewhere. Among them were high oil prices and supply chain problems, with many of the shortages and subsequent mark ups in price stemming from supposed COVID related snarl-ups. Then there was the alleged price gauging by large corporations who used the camouflage of shortages to raise prices and increase their profits.
Both the Federal Reserve and the Bank of Canada know that, of course. They also know, based on the experience of the 2008 bank meltdown, that, if interest rates stay high, many homeowners will end up in default over the next three years when they come to renew their mortgages.
As to who will end up buying up these repossessed properties, one has to wonder if the history of the 2008 mortgage collapse is going to repeat itself. Do we have a corporate landlord class gleefully waiting for the axe to fall on homeowners so that they can buy up property at bargain basement prices?
But perhaps I'm just being pessimistic. Perhaps we have a caring federal government that will somehow come to the rescue of the tens of thousands of homeowners who are in danger of foreclosure.
What do you think?
But then came the sucker punch. Since 2022, following the direction of the Federal Reserve in the US, the Bank of Canada has raised its overnight interest rate eight times. The rationale is that these actions were needed to fight growing inflation. Higher interest rates would limit people's borrowing. In turn, that would lead to less spending which means demand would go down and prices would fall.
Actually, that's a weak and phony argument. Inflation didn't rise because we, the consumers, were buying more things. The real problems lay elsewhere. Among them were high oil prices and supply chain problems, with many of the shortages and subsequent mark ups in price stemming from supposed COVID related snarl-ups. Then there was the alleged price gauging by large corporations who used the camouflage of shortages to raise prices and increase their profits.
Both the Federal Reserve and the Bank of Canada know that, of course. They also know, based on the experience of the 2008 bank meltdown, that, if interest rates stay high, many homeowners will end up in default over the next three years when they come to renew their mortgages.
As to who will end up buying up these repossessed properties, one has to wonder if the history of the 2008 mortgage collapse is going to repeat itself. Do we have a corporate landlord class gleefully waiting for the axe to fall on homeowners so that they can buy up property at bargain basement prices?
But perhaps I'm just being pessimistic. Perhaps we have a caring federal government that will somehow come to the rescue of the tens of thousands of homeowners who are in danger of foreclosure.
What do you think?
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