The Great Debt Shift

Do low mortgage rates have you thinking about pulling equity?
Are you blown away by the low number on your credit card statement?
You’re not alone.
Canadians have been saving more and racking up less consumer debt. One consequence of the pandemic is that credit card spending and consumer debt have decreased. On the other hand, low interest rates have many Canadians running to the bank to borrow more against their homes and income-properties. The mortgage lending sector is booming. You can listen to this week’s podcast for more analysis here.
What is everyone doing with their cash?
First, a lot of liquidity is seeking deals. The market for investment properties is hot, in part because so many buyers have pulled cheap cash in the hopes of acquiring more units. Debt coverage ratios are also affected by cheap money (as monthly payments go down, lending can be based on these lower numbers, which allows institutions to finance higher amounts). Banks are willing to lend more because interest rates are lower. With lending conditions altered to make buying more attractive, it’s hard to resist making offers.
The question is: are we kicking the can down the proverbial road?
Time will tell. It may seem like a good idea now to leverage to acquire more units, but will rising vacancy rates exert downward pressure on the price of rental property? At what speed will interest rates rise, driving the price of real estate down? Will an oversupply of condo units and employment uncertainty drag certain market segments down, influencing the supply of units across the board?
Without a crystal ball, it’s hard to know for sure. No one has the recipe for secret sauce!
It may be wise to think like the CHMC and introduce a “stress test” into your financial models. If you were hoping for a certain percentage of market appreciation, rent increases, or low vacancy rates, be pessimistic. Create a best-case and a worst-case projection. What about if interest rates bounce back when your mortgage term is up? How may your employment prospects change if the current recession becomes prolonged? What if finding good tenants gets harder?
Make sure your financial model is solid by broadening your horizon to potential negative outcomes. If your doomsday model holds water, don’t be deterred by analysis-paralysis. Even the wisest investors are operating on projections. Uncertainty doesn’t have to mean inaction. Make sure you account for a variety of possibilities, and flexibility will lead to sound decisions.
It’s better to build an arc and not to need it.
Happy investing!
You can check out the data for this Market Report here
2 replies
  1. Anne Bossy
    Anne Bossy says:

    « Banks are willing to lend more because interest rates are lower.«  Honestly Terry I’m finding the opposite. I managed to refinance a property in September with much blood, sweat and tears in spite of stellar credit and other conditions. I practically had to promise my first-born. I’m finding lenders are skittish and reluctant. I’m going to try another refinance soon but I bet it will be difficult. I do believe montreal has the bones to weather most RE ups and downs. Guarded respect for your last CIIQ podcast (with I think it was a PMML courtier hypothécaire?) who predicted an economic slowdown with rent crisis affecting landlords and property owners. Please correct me if I got that wrong.

    • Terrie Schauer
      Terrie Schauer says:

      Was that a residential mortgage? I should have been more precise and circumscribed my comments to multi-residential mortgage lending. Money in this sector is “easier” than in the residential field.
      Christian also mentions that CMHC has introduced “stress tests”, which involves tightening of criteria for financing despite low rates and higher debt coverage ratios. They are concerned with – precisely – the great debt shift.

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