Expert Panel

Panel guests:

Rob Butler
Butler Mortgage

Lauren Haw
Zoocasa

Bob Dugan
CMHC

Bob Dugan: Shortage of supply of housing in Canada, not building it quickly enough. Puts pressure on affordability. Tremendous growth in demand through population growth. Last year, Canada saw strongest population growth since 1957.

Because of high interest rates, home prices have come down. But because of mortgage payments at those higher interest rates, we still have an increased cost of home ownership. A lot of that population growth is moving towards the rental market, and we're seeing some frightening numbers in terms of rent growth, especially in units where there's turnover. Rent control protects a lot of people while they live in the unit, but as soon as they move out and someone else moves in, the rents correct to market prices.

Lauren Haw:  That's right. A lot of mortgages are still up for renewal. A lot of homeowners brought forward their refinancing to 2021 and early 2022, when you could essentially get free money. And then we had a 500 basis point jump. There are a lot of sellers in the market, but we haven't seen forced selling to a big degree.

Ron Butler:  Risk didn't turn out at all well for people with variable mortgages. The next 2 years in variable mortgages will probably be the most impactful renewal cycle. We have 4 banks that didn't raise payments, but interest payments just built up and built up, so that's going to be a sizable impact. So in many cases, mortgages actually grew over the last year and a half.

Bob Dugan:  A lot of people are facing payment increases. When you get behind on your amortization schedule because your payments aren't covering the interest, upon renewal you have to get back on your original schedule. Those people will be facing payment shocks down the road. 

Then you have folks with fixed rate mortgages renewing at higher rates, and that'll be a big payment shock as well. The BOC did some work and estimated that over the next couple of years, 50% of mortgages will be renewing at higher rates.

On one hand, you see interest rates coming down at the margin, but the effective interest rate for a lot of people renewing is going to be higher.

Lauren Haw:  They aren't. You can get 5-year fixed at under 5% right now, pretty reasonable. As Bob said, supply continues to be the true issue. Rates went down so low, and prices shot so high, because money was free. 

Now you have a number of sellers who don't want to sell for less than the peak. There's a pretty big spread between what sellers are willing to sell for and what buyers can afford to pay.

Ron Butler:  Some homeowners are hanging on, and some are starting to slide off because it's becoming too unmanageable for them. Uniquely in the last 6 months, we've started to see increases in unemployment. If that rises, then the impact of the renewal combined with the possible loss of income to the family could be the real problem we're going to see in the next year.

Bob Dugan:  Absolutely. Last year they came in much higher than expected, and a lot of that was multiple starts in Toronto and Vancouver that exceeded CMHC forecasts. A lot of the reason for that was that a lot of big projects had pre-arranged financing at rates that pre-dated interest rate increases. They were operating in a bit of an artificially positive environment.

But now what we see is that a lot of these multiple projects are not going to be happening to the same degree, particularly in Toronto and Vancouver. So overall, starts will decrease this year. Unfortunate, because the size of the supply gap means that the pace of housing starts has to double each and every year over the next 10 years to close that gap. Instead, starts are coming down, but we need them to go in the other direction.

Lauren Haw:  It's not. She believes that stats for Ontario are that 31% of the costs of a new development are taxes and government fees. If your average production cost is about 16% tax and housing's 31%, we're not going to tax our way into more housing supply.

Bob Dugan:  Very good question, and becomes more relevant as the BOC has more and more success combating inflation. In June 2022, inflation rate was 8.1% YOY, and it was fairly broad-based. More and more, the different components of inflation have been settling down. 

One of the strongest components right now is the cost of shelter, accounting for about 25% of the CPI. And a big part of that shelter cost has to do with mortgage interest costs. It's one of the fastest-growing parts of the CPI right now.

Speaks to the difficulty of running monetary policy. Tricky balancing act, because the BOC has to make sure that inflation is defeated before they start to cut too far. If inflation were to rear its ugly head again, the BOC would have to reverse course, detrimental to their credibility. On the other hand, if you keep rates high for too long, you can exacerbate inflation through higher mortgage interest costs and perhaps create too much of a slowdown in the economy.

BOC's doing a pretty good job so far, and inflation's coming down fairly gradually. The latest June number of 2.7% for year-over-year CPI is in the target range of 1-3%. Core measures have come down, but still outstanding issue of high shelter cost. That should start to come down as interest rate decreases continue over the coming years, as the BOC gets back to a more neutral policy.

Lauren Haw:  A spicy question these days, with all the changes to commissions going on in the States. The quick answer is that you actually don't. If you decide to hire a real estate agent to sell your house, you can decide at that time if you want to offer a commission to a buying agent or not.

A lot of people don't understand this, but you can sell your house however you'd like to as part of the negotiation. What is likely to get me the highest net $$ in my pocket at the end? 

A lot of people choose to sell their house using a real estate agent because if you're going to do this transaction only 1, 2, or 3 times in your life, and it's a big meaty transaction, you want to make sure that you're putting it in the hands of a professional.

People choose to incentivize buyers' agents to come and bring their buyers to homes. The nuts and bolts of why it  makes sense for the seller to often pay the buyer's agent is that they can then put that fee on the mortgage, instead of paying cash at time of closing. For the last 30 years at least, most sellers have decided to do it this way.

Ron Butler:  The reality is that we have a very low default mortgage rate in Canada, one of the lowest in the entire world. 

The loan loss provisions are rational because they're not just for mortgages. They're also for credit cards, auto loans, etc. They will prove to be correct; there will be substantial credit losses at the banks. So they're provisioning properly.

As far as mortgages are concerned, we will see increased defaults in mortgages. As to the idea that they're just giving out mortgages to anyone who wants them, he can assure people that it's just not that easy.

Lauren Haw:  It is a tricky environment to be a landlord. Though it's also a tricky environment to be a tenant. If it's in your own home, that has a number of different layers. If you need the income, then it's a matter of rolling the dice and doing a lot of really good tenant screening. Do your best up front to create a good structure. The reality is that most tenants are great.

You can evict a tenant for non-payment, however, it can take upwards of a year. So it is possible for most environments, most of the time, to go through the Landlord and Tenant Board and have a tenant evicted for non-payment.

Ron Butler:  A vendor take back mortgage is when the buyer pays a deposit, and the seller (vendor) gives the buyer the mortgage. So the buyer pays the seller the mortgage payments.

The good side is that is makes it a bit easier to sell a piece of vacant land. The really awful side is that the seller becomes a bank, and most people don't really understand the implications of that. What if they don't pay? How am I going to resolve this? How do I get them off title if I'm not receiving the money? You're going to end up with a lot more complications.

At the end of the day, the best possible choice is to just sell the land and walk away.

Bob Dugan:  Think about the way people qualify for a mortgage. You go into a bank, give them your income, the bank factors in the interest rate, and then it spits out a number of how much of a mortgage you qualify for. In an environment where interest rates were low, that number's a much bigger number than when interest rates are higher. Low rates can certainly drive a lot of demand for home ownership, and allows lots of people to go from renting to home ownership.

The story has really evolved. From 2012-2018 or so, a lot of the escalating costs were really a Toronto and Vancouver story. The rest of the country had fairly slow-growing house prices. Since the pandemic, it's been a more generalized problem of declining affordability across the country. A lot of it had to do with accelerated population growth, which exacerbated the supply issue. But it's always been a supply issue.

Seeing this not only in house prices, but also in rent prices upon turnover. In Toronto, turnover rents grew by 40% last year. Vancouver's closer to 30%. You're seeing big increases in numbers because supply is insufficient. That's one of the key reasons why house prices and rents have gone up.

Rob Butler:  When there's no spouse to pass a house on to, the house goes into the estate, and capital gains applies.
At the end of the day, it's not all going to be taxed, but there will be some tax. People worry about it but, sadly, it happens every day. A lawyer handles it and it goes through probate. 

If there are 2 people on title, and one dies, their interest will transfer for free to the other titleholder. In that case, there would be no tax implication.