JP: Are there any specific markets or cities that will be hit the hardest?
It seems very likely that Calgary will be the first market to correct. The affordability multiple was about 4.5 times in Calgary, since incomes there were much higher than Toronto and Vancouver. But now incomes will drop, perhaps substantially and therefore to get that ratio back to affordability might require a very large correction. Edmonton is similar to Calgary, although slightly less exaggerated. The surplus of condos in Toronto that is developing is dangerous too, as an oversupply of units could mean that condos, which are difficult to sell except when brand new, will be dumped on to the market by “investors” who have borrowed most of the money. Or by lenders who have foreclosed on the properties.
JP: What will be the impact on homebuyers and investors?
The most vulnerable groups are Generation Xers, people between 31 and 55. They have substantial real estate assets and large debts with little else in savings. The second most vulnerable group might be some baby boomers, over 55 years old, who didn’t save enough for retirement and were counting on equity in the home to fund their post-working years. Also, many baby boomers have helped their millennial offspring, younger than 31, to buy homes with gifts of down payments. There will be a lot of pain in some of these families as those younger people get into trouble with their mortgages.
The big winners are those young people who haven’t bought a home yet and will find that homes become affordable again, although they should wait a year or two before jumping in.
JP: Can you share any advice for homebuyers or investors?
If you are in those most vulnerable groups mentioned it’s OK to sell the property, rent for a while and enjoy being out of debt. You won’t regret it. It might mean having to sell at a loss. Don’t make the mistake of keeping a home you cannot afford just because the price has dropped, it’s better to sell even if it means taking a loss.
And, of course, buy the book and read it. There’s lots of new information that I uncovered in my research and I’m told it’s easy to read.
And if you are lucky enough to have investments outside of real estate be careful to diversify outside of Canada and away from real estate as many listed equities in the financial and real estate sectors will be hit by the crisis in residential real estate.