Canadian real estate prices are one of the biggest risks to the country, according to a big three letter organization. The International Monetary Fund (IMF), the global organization dedicated to sustainable growth, released a statement after an official “mission” to Canada. The organization cited real estate prices as a “key domestic risk.” Changing price expectations, mortgage rates, and unemployment were all cited as risks to home prices. The organization didn’t elaborate, so let’s take a quick look why these areas might be of concern.

A Sudden Shift In Price Expectations

Declining real estate prices are a possibility, despite what your real estate agent told you. According to the US Reserve Bank of Dallas, real home prices in Canada are down 5.72% from the second quarter of 2017. People haven’t been paying too much attention to it due to the fact that prices were up 4.45% from the previous year. However, price declines stall demand, which feeds lower prices.

Canadian Real Estate Prices

An weighted index of Canadian real estate prices, adjusted for inflation. Note the dramatic movement from 2003 in prices across the country, despite relative horizontal movement for decades prior.

Source: Federal Reserve Bank of Dallas, Better Dwelling.

Faster Than Expected Increase To Mortgage Rates

Faster than expected increases to mortgage rates were cited, but what’s expected? Ignoring the lack of qualification, rates are on the rise for the first time in quite a few years. The Bank of Canada’s average 5 year fixed rate is now 5.34%, up 15.08% compared to the same time last year. That hike by itself reduces the maximum mortgages that can be borrowed by just over 7%. Not to mention the impact to the wallet of the nearly 50% of homeowners expected to renew their mortgages this year. If you’re bullish on the Canadian economy, you’re bullish on rates rising.

Canadian 5 Year Fixed Mortgage Rates

The Bank of Canada’s 5 year fixed rate for mortgages is just off of record lows.

Source: Bank of Canada, Better Dwelling.

A Rise To Unemployment

Unemployment is near record lows, so it may not seem like a huge concern. However, if you know what “full employment” is, it’s not all that comforting. Full employment is the least unemployed people you can have in an economy, without the scarcity of unskilled workers driving wages higher. Higher wages sound great, but at the phase of full-employment, it accelerates inflation. The acceleration of inflation has the counterintuitive effect of devaluing all wages. You make more, but you can buy less.

Full employment is generally considered below 6% in Canada, and we’re at 5.8%. It’s a number we haven’t seen since ____, when [outdated reference]. You should expect wages to pop, inflation to soar, and/or employment to jump higher. The move results in decreased profitability for businesses, often forcing them to look for “efficiencies.” Think McDonalds rolling out widespread automated ordering machines, when minimum wages increased. The impact to GDP is usually positive near term, but that doesn’t mean a lot if you’re unemployed, does it? The first signs of full employment have already hit Vancouver, where service gigs can’t be filled due to the income to housing discrepancy. Still having trouble picturing it? Imagine Nunavat style wages, prices, and employment, but in Toronto and Vancouver.

Canadian Unemployment Rate

The rate of unemployment across Canada, seasonally adjusted.

Source: Statistics Canada, Better Dwelling.

The IMF’s risk statements were vague, but a little digging shows the data supports it. The 3 factors are headwinds to keep an eye out for, and may impact real estate prices in the not so distant future. Hopefully government agencies across Canada are preparing for these risks, and not just blaming mother nature.

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