This article was originally published on bigerPockets Forum.
I wanted to share with you what’s going on in Canada because I think there’s a lesson there for everyone, and I don’t think it’s getting any coverage in the United States.
Like the U.S., interest rates have been rising at an extraordinary pace in Canada, but with uniquely adverse effects.
Mortgage lending is different
There are no 30 year fixed mortgages in Canada. There are fixed mortgages that can be amortized over 30 years, but they can usually only be fixed for a maximum of 5 years. After that period, you will have to renew it at the current interest rate.
If this were to happen, mortgage payments could rise by as much as 60% in the worst cases. Home prices are also skyrocketing.
We have a level of adjustable rate mortgages that you would never see in the U.S., because if you break a fixed rate mortgage, there are severe penalties and you have to pay the bank all the interest that you owe. I don’t think there are penalties in the U.S., at least to the same extent. With an adjustable rate mortgage, you don’t have those penalties when you break an adjustable rate mortgage.
Adjustable-rate mortgages bring more uncertainty
About a third of mortgages are adjustable rate. People with these mortgages have their payments automatically go up whenever interest rates go up, completely wiping out their cash flow. In my case, my payment went from $771 a month to $1,250 a month. Luckily, I still have cash flow.
With some adjustable rate products, your payments stay the same, but the allocation between principal and interest changes, so you end up paying only interest and end up with negative amortization, which actually increases the amount you owe. This is not good.
People are losing money all over the place.
Prices are down 25-30% from their peak, with most of that occurring in 2022. People who were flipping homes were hit immediately, and many who were BRRRR found themselves short on equity and monthly payments due to rising interest rates. Properties are no longer appraised.
For example, in the Kitchener/Waterloo market, the average home sold for about $1 million at the start of 2022, about $200,000 more than the average list price. Now, two years later, the average list price has remained roughly steady, while the average sales price is roughly the same as or slightly below the list price. Additionally, the number of homes sold during this period has fallen by about half.
With inventory overflowing, seller expectations still at yesterday’s prices, and days on market skyrocketing, people can’t sell their homes easily.
I personally know many people who have gone bankrupt, lost their fortunes, or lost six or seven figures of money.
People who bought new properties years ago are now finding that their property values have fallen and they can’t complete the purchase because they can’t make the payments. This is one of the biggest disasters. Giving up on a six-figure deposit It’s something they’ve been building up over time. Roughly every few weeks, News Article Newly constructed homes are burned down, and in some cases entire residential areas are destroyed.
The reason behind this is not entirely clear, but it would not be surprising if people were trying to buy time as their homes had to be rebuilt.
Final thoughts
The Canadian recession is being felt primarily in Ontario and British Columbia. These two provinces account for more than half of the population, so I thought it was appropriate to title the article “Canadian Real Estate.” However, some people in smaller states have correctly pointed out that they are not seeing the declines in prices that I’m talking about. However, the country as a whole is feeling the negative effects of not having long-term fixed mortgages like in the U.S.
I decided to share this story because I believe anyone in the real estate industry will be interested in it and there are lessons to be learned from it, but it also presents some opportunities for creative real estate investors.
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BiggerPockets notes: These are opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
