Two extremes of todays market

Mortgage alphabet

While more than a quarter of Canadians say they plan to purchase an investment property within the next five years, another group of homeowners is beginning to feel the weight of debt obligations much more seriously.

Let us begin with the challenges — and with the ways to manage them or at least reduce their negative impact. People are giving up vacations. Cutting back on restaurant visits. Taking a second job or returning to an old one. Some are even reducing spending on basic necessities such as food and clothing. As bills continue to accumulate, many Canadians are already feeling the pressure and making difficult decisions in an effort to pay down debt. A series of recent studies has shown just how serious the situation has become.

At the end of May, the Canada Mortgage and Housing Corporation reported that Canadian consumer debt had reached a new international record — the highest debt-to-GDP ratio among G7 countries — while delinquencies on credit cards and auto loans were rising. This suggests that homeowners may begin falling behind on their mortgage payments as well.

Even Canada’s five largest banks, traditionally reliable engines of profit, are feeling the impact. Their quarterly earnings have declined significantly as they reported setting aside billions of dollars to protect themselves against bad loans. Financial experts say this may ultimately make it even more difficult to obtain credit, as banks tighten their own lending and spending practices.

Everything has a price. A report by BDO Debt Solutions, released on Thursday, found that in April, 30% of respondents felt “overwhelmed by their debt and did not know what to do about it.”

During the pandemic, when interest rates were still low, government support was flowing, and banks were less aggressive in collecting overdue payments on loans and credit cards, “it really masked the fact that people were using credit just to make ends meet,” said Mike Braga, Senior Vice President at BDO. “Now that things are improving again from a business perspective,” Braga said, “collections are increasing and interest rates are rising. You have a perfect storm of people carrying debts they thought they could manage — only to discover that they cannot.”

To cover their debt, more than half of respondents said they were cutting spending on non-essential items, 43% reported reducing spending on certain basic needs, and 26% said they were considering taking on additional work.

So what can you do if you find yourself in a difficult financial situation? We would like to reaffirm our commitment to the hundreds of Canadian homeowners we help every year consolidate high-interest credit card and other debts into one affordable mortgage payment, freeing up additional funds for everyday expenses. This is especially important today, at a time of rising balances on expensive credit cards and lines of credit, and amid the sharp increase in the cost of living.

If your current mortgage has a low interest rate and it does not make sense to break it before the end of the term, we can offer home equity lines of credit (HELOCs) or second-position mortgages to pay off expensive debts or to meet other financial needs.

Now let us turn to the good news — the signs that Canadians still have both the financial capacity and the interest to invest in real estate.

According to a new Royal LePage survey, more than a quarter of Canadians plan to purchase an investment property within the next five years. The survey, conducted by Leger and released on May 25, found that 26% of respondents said they were likely to buy an investment property within five years. Eleven percent of Canadians already own an investment property, and just over half of them said they plan to purchase another one within the next five years. “We know Canadians place a high value on home ownership — and it is clear that real estate remains a desired way to build wealth over time,” said Phil Soper, President and CEO of Royal LePage.

Still, higher interest rates appear to be weighing on people’s views of investment real estate. Just under one third of investors said they had considered selling one or more of their properties because of higher interest rates. Younger investors under the age of 35 were the most likely to consider doing so, at 54%.

Young Canadians still want to begin investing in real estate, despite the well-known challenges: high prices, elevated interest rates, and limited supply.

According to the survey, younger investors aged 18 to 34 were more likely than those aged 35 and older to own more than one investment property. The survey also found that 15% of investors do not own their primary residence, and the majority of them fall within the 18-to-34 age group. “Despite the challenges of low supply and higher mortgage rates, young people today are the most likely to make real estate investment part of their future financial plans,” Soper said. “In fact, the survey results suggest that many of them are prioritizing the purchase of an investment property over ownership of a primary residence.”

The most popular type of investment property is the detached single-family home, owned by 44% of investors. Condominiums rank second at 37%, followed by townhouses at 11%.

The potential for long-term appreciation in property value was the top priority for 69% of investors. Positive monthly cash flow and low maintenance costs followed.

Almost half of investors, 44%, said their investment property is located outside the city where they live. Proximity to a post-secondary institution was an important purchase factor for 47% of investors.

Having analyzed the real estate and mortgage market for more than 20 years, we can say with confidence that here, as in any other business, there is no universal formula for getting rich quickly. Real estate investment is a serious process that can deliver excellent results over the long term, but you must be prepared for uncertain periods and have a sufficient financial cushion to withstand market turbulence.