Stricter Lending Might Be Canada’s Real Estate Theme For 2023

Stricter Lending Might Be Canada's Real Estate Theme For 2023


Weaker holding power will be a sure thing for next year, and that was precisely what shook up the US market during the subprime crisis. 

You know what followed: defaults, a huge drop in prices, and eventually the collapse of banking systems. There are similarities now in Canada, and this is why OSFI is strengthening our banks to prevent a big catastrophe. 

This video isn’t here to scare you about next year but to let you understand a likely big theme for next year, which might be the increased difficulty in accessing capital, and this is something you need to keep in mind if you’re thinking about snagging deals next year. So in this video, let’s talk about what might be in store for next year.

What Happened During The Subprime Crisis

The Canadian and US monetary policies aren’t all that different. And yet, the effect of rising rates didn’t hit Canada that hard during the subprime crisis, which crashed the US housing markets. 

What was different? Well, it all comes down to the differences in lending. Between 2002 and 2005, when interest rates were extremely low, US borrowing rates were lower than those in Canada.

By now, you’re probably very familiar with this scenario. When you combine very cheap debt with real estate, people go on a big real estate shopping spree, and prices go up at an exponential rate. As housing prices grew faster, that attracted more attention, so more people got in, resulting in higher leverage and more market speculation. It got to a point where 12% of US mortgages had a loan-to-value ratio of over 90%; this was double what Canada saw for the same period. 

And when they couldn’t borrow from the lenders, they went to alternate lenders. In 2006, subprime mortgages made up 5% of the market in Canada but 20% in the US!

It turns out that price growth in the US doubled that of Canada between 2000 and 2006. Let’s think about this. Prices doubled during that period, yet the loan-to-value ratio was even higher, so they were way more stretched compared to Canada during that time. 

So once rates started to rise, it didn’t take long to see cracks in the system—starting with higher mortgage delinquency rates, drops in property prices, then mortgage defaults and foreclosures, even bigger drops in property prices, and even the collapse of banking systems.

The end result was that prices had to fall enough for new buyers to find them affordable again. Most people in the US are on 30-year fixed mortgages. A $300,000 mortgage at a 30 year fixed rate of 5.2% in the US is more or less equal to a $245,000 mortgage that went to a higher rate of 6.8% at a 30 year fixed rate. That’s an 18% price drop needed, and that’s exactly how much the US housing market actually dropped by at the bottom.

What's Happened To Canada's Mortgages So Far

The Canadian real estate market was spared then because our banking system wasn’t as relaxed, but it looks like we have gotten a lot more leveraged in Canada since then, which has sent our Canadian real estate price growth to the number one spot. 

In Canada, when rates were the lowest during the pandemic, we saw a huge spike in variable mortgages, which took mortgage payments to very low levels for that period. If someone was just getting by then, they’re actually probably in a similar situation compared to many mortgage holders in the US in 2007.

You can crunch the numbers for what might be needed to bring prices back to affordable levels, but it’s really necessary to get it to an exact science because markets often overshoot and undercut. However, we believe that the most vulnerable markets are those that rose the most during the pandemic, such as the lowest priced suburban homes in the GTA; these owners were most likely to be the most stretched and were likely to see the greatest declines.

And if you’re looking to buy, yes, this can bring some really great opportunities in the coming months, but you have to understand that next year’s theme might end up being more difficulty accessing capital, which might stop you in your tracks.

What's Changing For 2023

Here are changes that we already know about: OSFI is tightening capital requirements for our big banks to defend our banking systems, going from a 2.5% capital requirement to 3%, so basically that’s going to tighten up their lending. 

HELOC rules are getting stricter, going from an 80% loan-to-value ratio to 65% by the end of 2023. 

Plus, property prices are dropping, so there’s just less equity that can be pulled out to finance new purchases. We’re all experiencing higher living expenses, and that’s going to eat into how much we can save and use as capital for new purchases too. 

All of this means that it will be a lot harder to buy real estate next year, even if you want to, even if interest rates stop going up, and even if the price is right.

What To Do If You Want To Buy Real Estate In 2023


So if you want to snag deals in the GTA in the coming months, it’s important to get prepared now. Consider gaining more sources of income to strengthen your holding position and borrowing power. You can think about securing a HELOC before the financing rules change. 

It might also be a good time to think about restructuring your portfolio. For example, think about selling off properties in vulnerable markets before prices drop more over the coming months. This can help free up cash and improve your borrowing capacity, which will put you in a stronger buying position when you actually want to buy. You can also use this opportunity to reposition things into stronger real estate markets with better cash flows and better long-term returns. 

And if you need help planning and figuring this out, just reach out to our team.

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