1 in 4 Canadians may be FORCED to SELL if rates get higher

There was a recent survey released by Manulife Bank that suggested that one in four Canadians could be forced to sell their homes due to the current mortgage rate environment. They suggested that rising interest rates were pushing these people because of all their or payments that they had to make, not only mortgage related, but due to other things like inflation and job market security. The online survey conducted in the middle of April of this year found that 18% of homeowners poll they're already at a stage where they can't afford their homes.

If you are a reader of this blog, you likely know that the Bank of Canada has raised rates quite a bit since the beginning of this year and this is impacting people's affordability. Today’s post is dissecting this 1 out of 4 Canadians being pushed to sell their homes based on what the mortgage rates are doing and whether that's more of a clickbaity type title or if that's the reality in today's market.

Okay, so let's address a couple of things before we get into some real facts about this study and about what was published. Number one, inflation is bananas right now. I don't think anybody suspected that things were going to get as expensive as they are today. I know for myself and my family, we're being extremely thoughtful about the things that we're buying, the choices that we’re making when we're purchasing things and we’re really trying not to buy things that we probably don't need. I am so sorry Amazon, but I am not your best customer anymore. Sorry. 

So while many things in our lives have gotten much more expensive, including groceries, gas, generally everything, mortgages have also become more expensive as well. During the COVID-19 pandemic, mortgage rates completely plummeted as the government tried to push money back into the economy by getting people to buy homes. A recent article that I was reading about how much money is pumped into the economy when someone buys or sells a home was well over $110,000. That means when someone purchases a home, there is various industries that get compensated. They go out and maybe they buy paint. They hire trades and services for the new home and they probably buy goods and furnishings for their home as well. So this is why the government reduced the mortgage rates to get people buying homes because it was really good for the economy.

Well, fast forward to today. The economy is a little too good. The government puts so much money into the economy as well, helping to prop it up during the pandemic, mixed along with everybody feeling like they were making lots of money, the stock market was great, the housing market was great, and the economy took off. So their goods and services were not being created as fast as the economy was swallowing them up, thus creating inflation. It totally is difficult out there for people right now to keep up between gas and groceries and everything I mentioned earlier.

So there's no doubt that things are much more expensive and people are having a lot more of a tougher time today than they probably were a year ago in terms of being able to keep up with their financial obligations. So with that all being said, this 1 out of 4 Canadians being pushed to sell their homes, is that really a realistic number? And is that more of a facetious way of filling in a survey to announce that, yes, times are a little more difficult than they once were? 

Well, let's break down some numbers and put them into the context of the marketplace for Surrey, British Columbia. World Population Review reports that Surrey has approximately 169,000 dwellings in the entire city. That's a lot of homes. Normally, our marketplace carries anywhere between maybe 5,000 to 10,000 real estate listings. And when I say our marketplace, that's the entire lower mainland from Whistler all the way to Chilliwack. So with 169,000 dwellings in Surrey, that means 1 out of 4 of those dwellings, if they were forced to sell, would be 42,000. It is a little staggering to imagine that 42,0000 people would have to put their homes on the market based on the current mortgage rates and current economic conditions to sell their homes just to keep up. But that's what the survey suggests.

So let's keep breaking this down. I think it's also important to recognize the time in which this is being communicated. So it is June of 2022 as an example, and you may or may not know that mortgages in Canada since 2018 have been stress-tested. So what the hell is a stress test?

Well, a stress test is using whatever the best rate a bank might be offering you for a mortgage and adding at least 2% to that in case rates were to go up, or the 5.25% benchmark rate. Here's the kicker though they are going to use whatever number is higher. This means even if your lender was offering you a wicked rate of 2.99%, you would still have to qualify for the full 5.25%.

Because long time ago, the bank was worried about rising interest rates and wanted to make sure Canadians could handle the payments. There are also two calculations that a bank is forced to use to make sure that you can afford the payments on your mortgage and you're not getting too far over your head. One is called the gross debt service ratio, and the other is called the total debt service ratio. And a rough idea of where that number needs to be is in and around 42% for your total debt service ratio. This means the bank is taking into account everything that goes on in a person's life before they will comfortably lend you up to 42% of your income to put towards owning a property. This is including things like groceries, insurance, automobile insurance, automobiles, gas, everything. They use all these numbers to make sure that people can satisfy their payments and not get in over their head.

Because at the end of the day the bank doesn't want to have to foreclose on someone because they're not paying their mortgage, and that's not good for the economy. So Canadians have been stress tested since 2018. Well, we know that 72% of people tend to choose the fixed rate mortgage rather than the variable rate mortgage, and I'm going to talk about variable rate in a moment. 

But what were rates doing 5 years ago in June of 2017? A discounted five year mortgage, the absolute best rate that you could find was roughly about 2.24% fast forward to today where we're looking at discounted five year mortgages in and around the 3.69% mark. This increase on someone renewing a mortgage that maybe signed their five year fixed rate mortgage back in 2017 is over $1,000 every two weeks, which certainly is a lot of money to come up with every two weeks when you're not prepared for that.

The thing I might add, though, is It’s also important to remember what housing prices were back in 2017 in the Fraser Valley Real Estate Board, as an example, which covers North Delta all the way to Mission, the benchmark, or call it median or average price of a home was $732,000. You would assume that people have paid down quite a bit of their mortgage over the last 5 years, and that number that I shared of over $1,000 every two weeks was based on a very minimal down payment on a property worth about $700,000. Ideally, the people that bought that home back in 2017 have put down quite a bit, and they owe a lot less on their mortgage.

It's important that we recognize, too, that this general property value for a benchmark home in the Fraser Valley, which includes detached homes, townhomes and condos, was once at $732,000. But these people have made incredible amounts of equity on their properties since they've owned them as well. In fact, that number at today's market value is over $1.1 million coming in at $1.167 million.

This is clearly a meteoric rise in equity in their properties, which is certainly good news. So I don't want to forget about addressing variable rate mortgages as well, because there's no doubt that if you bought your home at the absolute bottom of the variable rate market, that your rate has gone up substantially. In fact, you could get a variable rate mortgage as low as 0.85% at the depths of the pandemic, which was an unbelievable deal. Right now, we're seeing variable rate mortgages as low as about 2.4%, which by historical standards is still an incredible number.

I think the important thing to take away from that, though, is from the absolute depth where that's not the average number over many years, that was at one point in time where it was absolute lowest. The variable rate is only about 1% and a half higher than where it was just a few months before. Now, that's all well and good, but again, we need to remind everybody that Canadians are stress tested for at least 2% or up to 5.25%, whichever number is higher. 

This means the calculations have gone into making sure that they can afford their mortgage if there was rate changes, which was a brilliant idea by the bank of Canada years and years ago to protect our economy from certain turmoil if we ever got into an environment where housing prices start to stagnate and mortgage rates need to go up, which might be exactly where we are today. So there you have it. That is diving into the manulife survey a little bit. And while it is really unsettling to hear that one out of four Canadians may have to sell their home, based on the information I've shared in this video, I'd be curious too.

Do you think that's more of a clickbait type headline?

Is that dependent on who they may have surveyed or based on everything that I've shared? Doesn't seem like it probably is going to be a lot more comfortable than what they suggest. I would love to hear your comments below on this, or if you're looking for any other information in a video, let us know and we'll be happy to put it together for you.

That's it for today, everybody.

I want to thank you for reading. I'm Darin Germyn with the Germyn Group, where we know you've only got one chance to either buy or sell your next home. So we're here to help you get it right. While you're down there getting in your comments, be sure to pick up one of our two free PDFs, either for home buyers or home sellers.

This is all about the challenge of the current market and how to maximize the value of your home if you choose to sell. And for anybody buying a home out there, there are six things that you want to make sure that you do not do. This PDF will help you be successful and make sure you avoid them as well.

That's it, everybody.

Thanks for watching and we'll see you on the next one. Bye.

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