What Keeps Me Up At Night

There are a lot of things in life to worry about it seems. Keeping in shape, are the kids grades good enough, will WW3 start in Israel, but let’s add something else on. Mortgage Arrears.

For the last 18 months or so, I have been downright bearish on the Canadian market. I have not seen a lot to get excited about. Now rest assured, when the time comes – and it will, I will change from perma bearish to ultra bullish quicker than a pizza disappears at a weight watchers convention.

Over the last 10 hours or so, I have been talking with some folks, and the news seems to be getting a little worse. Like a slow moving train wreck, I think the worst is about to come. The Canadian housing market has been akin to a box of fireworks – it could erupt at any given time. Now in order to erupt, you need a catalyst. Just like gasoline is useless without a spark, housing markets just don’t go up or down without something else becoming a catalyst. Today, I really wonder if the catalyst has now sparked off what could be a bad few months in real estate.

1. I spoke with a very good friend of mine today. It may surprise some of you that know me that I even have friends – but I do. Now this friend isn’t just a regular person – he is a property manager. He is the guy that the banks call when they take back a property, and have to go power of sale on said property. He is a long established business ,and has been around long enough to see various cycles of real estate. Hell, he witnessed the late 80’s Toronto condo collapse live and in person. Today he told me that he got over 25 properties from banks. IN ONE FRICKING DAY!!!!!! I asked him if he can remember a time when he ever received that many properties from banks. He couldn’t recall a day ever. It prompted some questions from me. How busy has he been lately? Well in 2022 his business was up around 30% from 2021. In 2023 his business was up around 50% from 2022. 11 days into January, and he has already received more properties than he did in the entire month of January 2023. Something is happening. Banks are finally starting to file Statements of Claims, and getting the homeowners – or I guess we should call them the former homeowners – evicted. This is a catalyst.
2. There is a MIC in Ontario ( No, I will not name it ) that has already started proceedings, or Statement of Claims on 27 properties in 2024 alone, totalling over 25 million dollars of mortgages. Now, there is a difference between a bank power of sale, and a MIC or private lender power of sale. Banks are required by law to be as fair as possible, get an appraiser, list at market price, market the property, and get every possible nickel for the property they can. MIC’s and private lenders are not required to do this at all, although many MIC’s and private lenders try. However, at the end of the day, MIC’s answer to their unit holders, and will try and liquidate as soon as possible. This could mean taking a haircut of 5%, it could mean 25%. We all know that property prices are based on recent comparable sales, so if we see one house sell for 200K less than the last because it was a power of sale, then it starts to put the downward pressure on the market. I know, I know, you need 3 sales for an appraisal to make a market truly adjust, but if one MIC or private comes out swinging and drops the price by 200K, it can erode confidence in a particular market quite quickly. This is a catalyst to have the market start moving back down again.
3. Appraisals. After my enlightening chat with my property manager, I called my long time real estate appraiser. What a bad day he was having. He has run into a real problem. A person will sell their house, or condo, or duplex or triplex, or whatever, and the buyers bank will want an appraisal. So, my appraiser goes out with the buyer, and the realtors. However, the tenant that is renting the unit from the current owner refuses entry. Even if they can get inside, tenants are refusing interior pictures ( which they can do in Ontario ), and so the appraiser cannot take pics. No lender will accept an appraisal without interior pictures. Deal falls apart. With the amount of people that rented out the pre con they couldn’t sell, this will become a big problem. Tenants are now being told in chat groups, message boards etc, that they can do this. As this becomes a ” thing” it could lead to more and more deals falling apart. For a market – any market to function, you need regular transactions. This is known as liquidity. If you cannot liquidate an asset, what is the value? This also reduces the number of sales, and it disallows people selling their rental to move up to a larger single family home. It all starts to add up. This could be a real catalyst in the rental market, and cause some real issues.
4. And finally a totally random, non provable, completely arbitrary indicator – sentiment. The number of people that tell me ” the worst is behind us “, and ” things are going to turn any day now” , and the old classic ” once interest rates get cut in the Spring, housing will rebound” are at all time highs. As I have said multiple times, whenever everyone thinks something will happen – it is usually safest to take the other side of the bet. Everyone is saying, and many in our business are quite literally banking on the market turning up. If we are starting to now see a mass amount of power of sales, evictions, and liquidation sales, I can’t imagine the worst is yet behind us. For every house that is going power of sale, there is 3 more who have not even renewed out of the 1.69% 5 year fixed. There is going to be a lot of people dealing with the renewal cliff in 2024, and some of them, much like the little guy on the Price is Right game, will fall over the edge. Like the old saying on Wall Street goes ” don’t buy until there is blood in the streets”. We have witnessed pain in real estate, we have witnessed discomfort in Canadian real estate, and we have had a lot of people in some very tough spots – but we have not yet seen the blood in the streets. 

I am sure there are some positive things happening, but I can’t find them. It could be a dark and gloomy few months in real estate until we can get all of the issues cleared out. Power of sales will have to work their way through the system, and be able to find a willing buyer that qualifies. With rates this high, that could be a challenge. Just because the property is power of sale, and 200K less – doesn’t mean someone can even afford to qualify. Until it becomes a popular opinion that the power of sales have stopped, a lot of people will sit on their hands and wait for a lower price. This is called a buyers strike. We could realistically see that happen. 

Get your business plan ready, know your local market, work with appraisers and property managers to try and get the scoop on what is going on. It will make you better versed, and you will be seen by your clients as a source of reliable info, and potentially info that could help them secure a good home for a fair price. Some of the people that are losing their home may not be great candidates now – but 2 years from now they may have turned things around. You always need to be filling the pipeline with future deals. Go out and educate yourself on the power of sale process, what it entails, how it works, and how you can help people going through it. Be hungry for knowledge, be willing to learn, and the only thing that will keep you up at night in the future will be the tax bill on all of your earnings.