Canada’s Financial Post reported last week that a report published by Fitch Ratings, the world’s leading credit rating agency, said that homes in the GTA are overvalued by an average of 32%, and that although the average price of all types of homes is now over a million dollars, they are not worth that much, and if the bubble is blown away, the average price should actually only be about $780,000 at most.
It seems that the rating agency is still polite, a real estate agent in Vancouver said amazingly, he said that the Canadian housing market is now very much like the time before the collapse of the United States, if his prediction is accurate, then it is estimated that prices will fall 40% in the future!
The real estate agent, Adam Major, is not only the manager in charge of brokers for B.C. real estate firm Holywell Properties, but also the CEO of the company’s real estate tracking site, Zealty.ca, Toronto’s English-language website NOW reported Monday. Major recently said that the situation that led to the collapse of the U.S. housing market in 2008 may now be happening in Canada, and he appealed to the government and authorities: “It’s time to take some action.
As we all know, the reason why the U.S. housing market collapsed back then was mainly due to the so-called subprime crisis. The real estate agent pointed out that the so-called subprime crisis is, frankly speaking, to help borrowers qualify for loans, banks and financial institutions to provide them with a very low “Teaser Rate” (Teaser Rate). The “Teaser Rate” is also known as the adjustable rate, that is, in the mortgage loan, with a very low starting interest rate to tempt borrowers, and after a certain repayment period, the loan interest rate will begin to adjust and gradually rise.
Major explained, “In the U.S. from 2005 to 2006, about 30 to 40 percent of all mortgages sold by banks were at such ‘enticing rates,’ meaning that the interest rate was initially low, but then kept rising after two years.” Buyers then found that rising interest rates led to rising monthly mortgage payments and they were increasingly unable to pay their loans. And to add insult to injury, house prices began to fall, making it impossible for them to refinance their mortgages as their homes became increasingly worthless.
Major points out that many Canadian home buyers are now getting mortgage rates of 1.5 per cent or less, and because of this, “we are now in a position where nearly 100 per cent of mortgages sold in Canada may fall into the ‘temptation rate’ mortgage category.” To that end Major did the math: If a buyer has a fixed mortgage at 1.5 percent, if the rate increases to 3.5 percent, the payment will increase by 30 percent. About two or three years ago, Major recalled, Canada’s mortgage rate was 3.5 per cent. in 2007, the rate was almost 6 per cent. At a mortgage rate of 5.5 per cent, he said, the payments would have increased by 63.5 per cent. If the interest rate rises to 7.5 percent, the repayment will be almost twice as high as when the interest rate was low.
I don’t think mortgage rates will go to 7.5 percent, but they could easily go back up to 3.5 percent,” he said. Will it go up to 5.5 percent? That means the homeowner’s monthly payment will increase dramatically. If they’re paying $3,000 a month now, they’ll have to pay $4,905 a month after it goes to 5.5 percent.” Major says mortgage rates are incredibly low now, but his concern is what will happen in five years? He thinks if mortgage rates do go up to 5.5 per cent, then many people in Canada won’t be able to afford to keep their homes.
In other words, if mortgage rates rise to 5.5%, then not only will not many people be able to afford to buy a home at current prices, but even if they do, it will be difficult to afford the monthly payments. What will follow is that when no one can afford to pay the mortgage and buy a property, many sellers will not be able to find buyers in the market, which will of course put downward pressure on prices. Major boldly predicts that “if the average mortgage rate in Canada reaches 5.5 per cent in five years, we could see home prices fall, possibly by up to 40 per cent.”
Major noted that Canadian home prices are much more overvalued now than they were in U.S. real estate before the market crash of 2008. He said, “We could see more of a correction in home prices in Canada than we did in the United States. At that time U.S. home prices were down 34% and we are now much more overvalued, so how much lower will Canadian home prices fall because of that?” Major warned that the Canadian market is so hot right now that it’s like being on fire, and if you’re not careful, you could “play with fire”. He said many people may be too hot-headed to believe him, but the adage “never catch a falling knife” is his This is his advice. The Bank of Canada is now aware of the speculation in the market, but does not intend to intervene and kept interest rates low after the latest rate meeting, saying that the economy needs to be stimulated under the epidemic, but mortgage rates in the country have actually crept up.
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