becoming debt free is only the first step
February 9, 2024

According to the International Monetary Fund (the “IMF”), house pricing in Canada was overvalued by as much as 60% in 2013.  House prices increased exponentially during the lockdowns across nearly all Canadian markets.  Some markets, mostly in more remote, rural or underpopulated areas, remained relatively stable during the boom. However, prices in these regions have since climbed as people exodus other, less affordable, markets in pursuit of affordable housing options.

Some larger cities have a long history of higher than (national) average market prices.  Vancouver has been a particularly volatile market leader, with Montreal and Toronto hot on its heels.  However, government-imposed lockdowns encouraged people to work remotely and drove workers from more expensive markets into smaller, less expensive, communities.  This transition allowed city dwellers to cash out of expensive big-city dwellings and trade up to more comfortable and affordable suburban residences.  This mobility led to higher values in smaller towns as city folk eagerly bid more money for what they perceived as cheaper housing.

Another driving force was undoubtedly the real estate industry itself; realtors are paid an average of 5% of the sale price (plus HST) for selling residential properties and are thus motivated to drive the price up.  The lockdowns really fed the frenzy by inhibiting property inspections, including proper appraisals, leading to people buying homes sight-unseen and waving common sense conditions.  As prices surged the fear of being left out rose and people were prepared to take unnecessary and sometimes ridiculous financial risks – urged on by the government.  The government also fed the housing crisis by encouraging first time home buyers to take out RRSP loans and cash out existing investments for Homebuyer Plans. 

The payment of outrageous CMHC insurance premiums put many homebuyers at even greater financial risk as they basically funded the bankers slush fund.  A lack of inventory also contributed fuel to the fire with new listings attracting high numbers of competitive and speculative bids.  For younger people, and particularly first-time homebuyers, it seemed as though buying a house was an opportunity of a lifetime that could slip away at any moment, and almost any risk would somehow pay off in the end. 

Everyone knows the price of housing always goes up, right?  “Buying a house is the most stable investment you can ever make” says everyone in the industry.  That may appear to be true on the face of it, but a deeper dive is recommended. As with all balloons, what goes up must come down.  By February of 2022 the London market saw an unprecedented average price of $832,000, but where were the “investors”?  The average homebuyer, especially first-time homebuyers, financed that purchase – they never invested anything, except debt, in the home.  As at this writing we were just informed the average house price has “rebounded” to $606,000.

In addition to other factors, prices were driven by low interest rates, reckless and malfeasant bankers who were lending money as if it were the last day on earth.  In fact, recent news reports show how bankers were gleefully lending money to foreign purchasers based on obviously fraudulent information – but the banks are “too big to fail”.  We cannot blame rising rates as the cause of the drop in price, the price as noted in the first paragraph was always far too hard.  The fact is that the massive amounts of debt that Canadians have accumulated in the past five years coupled with increased taxation and stagnant wages make access to more debt impossible.

For house prices to return to normal many people need to get burned, financially.  The takeaways should be. do not trust bankers, period, and do not fall for sales pitches that involve large risks.  If you are unsure of what your debt risk tolerances are talk to a Licensed Insolvency Trustee even before you embark on the greatest financial chance (homebuying) you will take.  You may not like our suggestions but they are realistic and do have your financial wellbeing in mind, not banker bonuses and shareholder dividends.