The Disaster That is Canadian Real Estate ... and Lessons From It

[Dan Illes]

I wanted to share something that has been going on up here as I believe there are lessons for everyone, and I don’t think this gets coverage at all in the US.

Up here in Canada we have had interest rates increase at the same crazy pace that the US experienced but are seeing some very negative consequences from it that are unique up here.

In Canada we do not have 30 year fixed mortgages. We have fixed mortgages that can be amortized for 30 years, but typically can only lock them in for 5 years maximum. Once that term is up you have to renew at the current rate. As this happens people’s mortgage payments have gone up somewhere around 60% in the worst scenarios. Our housing prices are insanely high to begin with.

We take adjustable rate mortgages at levels you would never see in the US. This happens because there are stiff penalties for breaking a fixed mortgage where you end up owing all the missed interest to the bank. I do not believe the US has these penalties at least not in the same way. Going adjustable gets you out of these penalties should you break an adjustable mortgage. Somewhere around a third of mortgages are adjustable. People on these mortgages had their payments go up automatically with every interest rate increase and saw cashflow completely wiped out. I personally had one go from $771/mo to $1250/mo. Luckily, I still cashflow a little bit. Some of the adjustable products, the payment stays the same, but the principal to interest allocation changes to the point where people are only paying interest and are now in a negative amortization where the amount they owe is actually going up. Not good!

Prices have fallen 25-30% since the peak. The majority of this happened in 2022. People flipping homes instantly got crushed and many people doing BRRRRs ended up under water both in equity and monthly payments as rates went up. Places would no longer appraise.

People cannot sell their homes easily either as there has been a flood of inventory, seller expectations are still yesterday’s prices and days on market are through the roof.

I personally know a number of people that have went bankrupt, lost properties and a ton of people that have lost money in the six or seven figures.

People that purchased new construction years ago are not able to close on their purchase as they are now worth much less and can’t afford the payments. This has been one of the biggest disasters. People are walking away from six-figure deposits they’ve made over time. Almost every few weeks there is a news story of new-construction homes burning down sometimes whole subdivisions. We don’t fully know the back story on this, but it wouldn’t be surprising if it was people trying to bide time as homes have to be rebuilt.

I decided to share this story as I’m sure anyone in the real estate world would find it interesting and there are some takeaways from this. On the flip side, this has presented some opportunities for the creative real estate investor as well.

Some news story links and a snapshot of what has happened to prices in my city.

https://www.cp24.com/news/video-shows-massive-fire-that-destroyed-under-construction-homes-in-burlington-1.6671785

https://www.thestar.com/real-estate/toronto-area-buyers-are-walking-away-from-deposits-on-new-homes-some-losing-as-much/article_db451c58-5c4b-5269-8510-17095d5496e1.html

[Jay Hinrichs]

Quote from @Marcus Auerbach:

6% is above average. I found a builder's ad from May 1960 offering a brand new ranch home for $21,000. I believe it was $350 down with FHA. As the ad pointed out that even included AIR CONDITIONING!

Today it is worth about 350k, which comes out to about 4.5% per year and that includes the 1970's, 80-'s and 90's - basically 3 decades of economic decay in Milwaukee. But non the less the value has doubled several times. We are seeing this now again, where real estate values have basically doubled sice 2015.

yes most markets will have a stagnet period.. even the bay area had depreciation from 89 highs to 93 94 then stagnet till 99 or so.. then sky rocketed again.. 

[Jeremy H.]

So, if anyone search why doesn't Canada have 30 year fixed, the first article says they attach all your assets as collateral /lien.

Seems like getting a mortgage is a big deal, but is it true you will lose everything you own if you default (with Canadian mortgage)?

[Stevo Sun]

Quote from @Jeremy H.:

So, if anyone search why doesn't Canada have 30 year fixed, the first article says they attach all your assets as collateral /lien.

Seems like getting a mortgage is a big deal, but is it true you will lose everything you own if you default (with Canadian mortgage)?

 Most places in Canada have recourse loans, so if you default they can go after you for everything. But the typical recourse is just foreclosure. If there is a gap after that they can do other things to make themselves whole.

[Anthony Therrien-Bernard]

Quote from @Jeremy H.:

So, if anyone search why doesn't Canada have 30 year fixed, the first article says they attach all your assets as collateral /lien.

Seems like getting a mortgage is a big deal, but is it true you will lose everything you own if you default (with Canadian mortgage)?

 Mortgages on a corporation and personally owned properties aren't quite the same. At least for the province of Alberta personally owned properties are usually non-recourse, so if you default they take the property back but don't go after other assets. On the other end pretty much all mortgages on a corporation require personal guarantee which is full recourse