Words of Warning

Moshe-Milevsky Moshe Milevsky is one of the most respected mortgage commentators in the country. A few months ago he had words of warning for those wondering how much home they can afford in Canada’s white-hot real estate markets.

He stated:

“At some point [prices] just become so detached from reality that you have to stop and tell people: ‘you are going to lose money on this deal.’ You have to think very carefully about whether this is the right thing for you.”

“I suspect that what’s driving [record home prices] is the very, very low interest rates. All you have to do is put down 5%, and you can leverage up 19- or 20-to-one. That’s driving this, and I don’t think it’s going to end well for a large group out there.”

Mortgage-warningIndeed, there are indications that consumer buying power is about to take a tumble once the Bank of Canada starts tightening.

CIBC economist, Benjamin Tal, says:

“The start of the tightening cycle will find a highly leveraged consumer with a debt-to-income ratio approaching a record-high 150%. This is 40% above the ratio seen the last time the Bank of Canada started to hike. This means that monetary policy will be very effective in slowing the consumer.”

A “slowed-down” consumer will spend less on housing and that could put a damper on home prices overall. 

This is just something to keep in mind if you’re contemplating a new home purchase—especially if it’s a bidding war situation and/or you’re putting less than 10% down.

Take it slow. Overpaying makes no sense–regardless of the market. The last thing you want is to experience negative equity and curse the day you put in your offer.


Sidebar: In case you missed it, here’s BoC governor, Mark Carney’s, thoughts on home prices:  Housing Market Cooling…

  1. There is about to be an epic correction in the housing market. I predict that some markets may see a 40% price reduction (Van, TO, Cal) and that almost all markets will see a 20% correction. It is going to be messy but it is needed.

  2. Problem is, that would utterly destroy the banking system and so the economy as a whole. To prevent this the govt will step in to support the market, just like last time (additional money to CMHC).
    I think they will do what they can to float the thing until inflation makes all previous bets good, while also curtailing the worst lending excesses (as they just did with the April 19th rule changes).

  3. PS, I agree with your reasoning, just not your conclusion. It IS overvalued. The needed correction is just too unpleasant to be allowed to happen without a fight….

  4. See the world market, property value takes whole world in consideration for Toronto.
    Locals do not drive Canada anymore.

  5. Canada’s big cities have had a constant influx of wealthy immigrants for decades. Why is it only now that we hear statements like “locals do not drive Canada”? Looking at the numbers, Canada’s big cities have some of the highest price/income and price/rent ratios in the world — why has this suddenly become more attractive to wealthy foreigners?

  6. Totally agree.
    Toronto prices fell quite a bit during the late 80’s + early 90’s despite the mass inflow of wealthy
    immigrants from Hong Kong in advance of reunification with mainland China in 96. The wealthy foreigner impact is greatly exaggerated.

  7. Wishful thinking. If the United States couldn’t “float the housing market until inflation catches up”, what makes you think Canada could?
    Even if we loosened CMHC even further, consumers only have so much of an appetite and ability to service debt. At over 140%, Canadians are tapping out …
    A crash is very possible. Turbulence, a certainty.

  8. Calling the date of a bubble pop is extremely bold.
    I wouldn’t put my money on that date, but what cannot be sustained will not be sustained.
    Toronto and (especially) Vancouver are simply not immune to the laws of gravity. Don’t forget to bend your knees when you hit the ground.

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