Webcast #28: Will 25% of Canadian Homeowners be Forced to Sell their Home? (7 minutes)

According to a recently published Manulife survey, Canadians are so concerned about rising interest rates that many feel they will have no choice but to sell their house.

The survey was in the field between April 14 and April 20, 2022. Its sample size exceeded two thousand participants between the ages of 20 and 69 that earn over $40,000 per annum. The results are considered accurate +/- 2.5%, 19 times out of 20.

The most troubling statistic said that 25% of Canadian homeowners believe they would be forced to sell their homes if interest rates were to increase further. In addition, 1 in 5 homeowners believe they can no longer afford to live in the house they own. Half said they would struggle to handle unexpected expenses. 40% do not feel their wages are keeping up with inflation and 8 in 10 believe there is an affordability crisis in Canada.

Before jumping to conclusions, debt surveys – which that keep investors like us awake at night – get published every so often. Their results are often overly dire that fail to materialize.

Since the financial crisis – now fourteen years old – regulators have progressively introduced new requirements for financial institutions in order to avoid another 2008 from repeating itself. Banks regularly conduct stress tests that contemplate recessionary environments and how a declining economy would affect their mortgage portfolios. Canadian banks have been far more conservative with their mortgage loan approval process relative to their foreign peers. Even during the financial crisis, Canadian banks continued to pay their shareholder dividends and were far better capitalized than their U.S. and European peers.

Furthermore, 73% of those surveyed conceded to not having a written financial plan while 47% lack a household budget. Without a financial plan or budget, how can one suggest their home would have to be sold if rates increased? We would argue that many of the participants answered the questionnaire based on emotion rather than reason.

Nearly 70% of Canadian mortgages pay a fixed rate, which means their regular principal and interest payments stay unchanged until the loan comes up for renewal every five years. The Bank of Canada has warned that mortgages undertaken during the pandemic could experience a 30% cost increase upon renewal in the next 3-4 years. However, during the pandemic, home prices also increased by 50%, which will provide these same borrowers additional collateral flexibility upon renewal.

Lately, however, many have opted to enter a variable rate mortgage. Over the last year, about half of new mortgages have been variable rate. As interest rates jump, the monthly payment that a mortgagee repays to the lender stays unchanged. What adjusts is the amount allocated to the principal because the interest cost increases in conjunction with higher rates.

While we believe these survey results are overly dire and won’t ever come to fruition, we also think that the statistics suggest the consumer will rein in their expenses (due to fear of the future), which will help cool inflation. For example, 50% of the participants admitted to reconsidering their summer vacation plans due to affordability concerns. While this survey was restricted to Canadians, surely the results are representative for those living abroad. In the U.S., with falling consumer sentiment (now at the lowest on record since the early 1980s) and declining retail spending (down 0.3% in May compared to April), the economy is surely slowing down. A slowing economy should help bring down energy prices, which is presently the leading culprit for higher inflation and aggressive rate hikes.