The coronavirus tests this theory.
As foreclosures, job losses and uncertainty hover over UK property markets to Australia and Hong Kong, the situation in Canada is more precarious than most. As its petroleum sector has shrunk in recent years, Canada’s economy has become increasingly driven by real estate, an industry now in a state of paralysis. Almost one in three workers applied for income support.
In addition, its households are among the most indebted in the world, poorly placed to weather the storm.
“I think it’s the big judgment,” said Douglas Hoyes, trustee in bankruptcy in Kitchener, Ontario. “We have lived for so long that the property you bought or the level of leverage you imported does not matter. Well guess what? Now it counts. “
Since the economy started closing in mid-March to slow the spread of the coronavirus, policymakers have run to shore up the housing market. Banks offer mortgage holidays, including to owners with multiple loans on investment property.
This has raised eyebrows, even within the real estate industry. “Should a person with four properties really need financial assistance? Asks Steve Saretsky, a Vancouver real estate agent. “Where exactly to draw the line? “
A “flammable” market
The country may have no choice but to support housing. Real estate has become the largest sector in Canada. Including residential construction, it represented 15% of economic output last year; energy represented 9%.
If it collapses, there is not much that can catch up – certainly not oil or the seemingly unruffled consumer. Canadians have been on a spending spree for two decades since a downward change mortgage rates started in the 1990s. Toronto and Vancouver, the two largest housing markets, did not experience any major correction during this period. Housing has become a machine for evoking wealth. As values soared, homeowners felt wealthier – they spent more, borrowed more, and sent even higher prices.
This virtuous circle has just emerged. City of Vancouver worried about going into insolvency after surveying residents and finding 45% of households say they can’t afford their full mortgage next month and a quarter expect to pay less than half of their property tax bills this year.
This is a stark contrast to 2016, when those who were fortunate enough to own a single house in the west coast city saw their balloon net on average more than $ 1,600 (US $ 1,130) per day without ever leaving the House. In one year, the city’s property values jumped $ 47 billion, more than double the cumulative net income of all its residents.
Significantly, consumer financial watchdog billboards began to appear – “Don’t use your home as an ATM” – as homeowners borrowed against these earnings to finance renovations, vacations and rental properties.
Today, Canadian households owe $ 1.76 for every dollar of disposable income. In Vancouver, that amount rises to around $ 2.40 – a ratio that puts the so-called North American supercar capital on par with Iceland before the global financial crisis.
Recessions tend to be deeper and last longer when households are in debt – an alarming prospect for a nation that may already be experiencing its most severe contraction ever. Canadians owe $ 2.3 trillion in mortgages, credit cards and other consumer debt, roughly equal to the country’s GDP, an even higher ratio than that of the United States before the housing crisis .
“You have all these flammable items that just need a spark, an external shock,” said Anthony Scilipoti, president of Toronto-based Veritas Investment Research Corp. “And this virus is the worst case that any of us could have predicted. “
Airbnb customers disappear
It doesn’t take much to tip an apparently tight market into a crisis. If only 2% of the housing stock were to go on sale, it would trigger the kind of supply shock behind a crash in 1990, according to Veritas.
Most often this comes from investors, half of whom did not generate enough cash to cover the cost of owning their rental properties, Veritas said in a survey conducted last September.
For homeowners with losses, the situation is about to get worse: approximately 30% of the apartment rent due on April 1 has not been collected, according to estimates from CIBC Economics. This corresponds to similar estimates of rental collections in the United States.
Then there are those who have invested in properties for the short-term rental market who are almost dried up because of travel restrictions. Nearly a third of Airbnb hosts in Canada – who jointly had 170,000 active registrations at the end of 2019 – need income to avoid foreclosure or eviction, Airbnb said in a letter to the Canadian government last month .
Faced with a rapidly collapsing tenant base, more than 200 Canadian ads have exploded in recent weeks on Vrbo and Airbnb, posing as seclusion or quarantine havens, many offering Covid-19 discounts, according to data from Toronto-based Harmari, which analyzes online classifieds. Airbnb’s former rental units have also increased in sales lists.
Economists and lenders have long emphasized two pillars that underpin housing: a robust labor market and the largest increase in international immigration in more than a century. None holds up.
Almost 6 million Canadians have applied for income support. Lenders had deferred nearly 600,000 mortgages, or about 12% of the mortgages they held, as of April 9. Meanwhile, immigration targets, based on an increasing labor shortage, will almost certainly be lowered.
In measures that overshadow those taken during the global financial crisis, the Federal Housing Agency and the Bank of Canada are ready to buy billions of dollars in mortgages and mortgage-backed securities to support the market, while legislators have adopted a historic payroll to stem job losses.
“It’s great that we have a government that says it has the financial power to do it, but anyone with math skills can calculate that my daughter’s grandchildren won’t even be able to pay for it,” said Reza Sabour, a Vancouver mortgage broker. “What’s the plan after?” “