At the tail end of a historic bull run in Canada’s housing market last year, investors came to comprise a fifth of the country’s homebuyers. Now, they are some of the first scrambling to unload properties in what some are already saying could be the most severe housing market downturn in the country's recent history.
In early July, Toronto-based mortgage broker Ron Butler’s client called him with exactly that dilemma: The financials on the suburban condo he purchased as an investment property just four months earlier no longer made sense. Rents could no longer cover interest payments on the mortgage after a six-fold jump in the central bank rate.
Butler advised his client to sell, instead of losing money on the property each month. The Bank of Canada raised its benchmark rate another percentage point to 2.5 per cent just a week later, so Butler is bracing himself for even more calls like that.
“It’s starting now,” Butler said. “Every quarter there’s more bad news. More renewals. More negative cash flow. More, ‘Does it make sense to hold onto this rental?’”
As long as rates stay high, he predicts investors will turn into a steady stream of forced sellers and further weigh down home prices. “The economics of this thing for the next two years just don’t make sense,” Butler said.
Over the last year, the central bank issued repeated warnings about the risk investors posed to the market as they became a greater share of the country’s homebuyers. Not only are investors thought more likely to sell in a downturn because they don’t live in the homes they own, the volume and type of debt they were taking on — specifically loans with a floating rate — could make them more likely to experience a financial squeeze if rates rose and prices fell. Now it looks like that’s exactly what’s happening.
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