Housing Crash Deepens: No Recovery Until 2028 | Ron Butler

Ron Butler · Butler Mortgage

Tiny Canadian condos are the most beaten-up real estate category and will lag any recovery.

Butler's 'dog crate' condos are under 500 square feet, often around 385 to 425 square feet, with poor layouts and weak buildings. They face falling prices, falling asking rents, rising property taxes, rising condo fees, and higher mortgage rates that will keep damaging them. He says they are the most beaten-up single category of Canadian real estate. Even after ground-based homes such as single-family houses and townhouses recover, the difficulties for tiny condos will continue for quite some time.

“It is certainly the most beat up single category of real estate in Canada.”at 20:00

Ron Butler · Butler Mortgage

Ontario and BC rental-property owners should sell now, even at a substantial loss.

Butler says many Ontario rental properties now have negative cash flow while their values are falling. Canada has seen 24 straight months of lower asking rents, particularly in Ontario and British Columbia. Meanwhile property taxes, mortgage rates and monthly condo maintenance fees keep rising. Owners who are losing money every month and see values dropping should sell even if they take a large loss.

“People better get serious about selling these things even if they're gonna take a substantial loss.”at 21:11

Ron Butler · Butler Mortgage

Court-ordered foreclosure sales clear 8-10% below prior lows, creating new comps that push regional prices lower.

Butler says his team has tracked court-ordered and power-of-sale foreclosure sales and found each one closes about 8-10% below the lowest prior sale. Buyers bid as low as possible, and each sale becomes a new comparable, so the whole neighbourhood or region reprices lower. This has played out consistently for almost a year. Financial pressure has been grinding for a couple of years and looks set to last another year or two. Homeowners whose homes are worth less than the mortgage are increasingly tempted to stop paying and wait out the lender's process rent-free, so the number of forced sales grows and keeps pushing values down.

“...that sale is always between [8-]10% lower than the lowest previous sale...”at 26:40

Ron Butler · Butler Mortgage

Ending the federal foreign-buyer ban won't lift Canadian home prices; there is virtually no buyer interest.

Butler says provinces are keeping their large taxes on foreign buyers, so removing the federal ban changes little. Foreign buyers have also declined, since most came from mainland China and the Chinese property market has collapsed. Buyers also avoid markets where they might catch a falling knife. He says there are no buyers queued for the January 1, 2027 expiry and that the belief otherwise is wishful thinking from real estate agents.

“Anyone who feels that the end of the federal homebuyers ban will cause an immediate upward movement in home prices, we we say that those people are smoking the hopium pipe.”at 30:11

Ron Butler · Butler Mortgage

Canadian housing won't recover before 2028; prices must first stop falling, likely through 2027.

Butler says a housing recovery starts only when prices stop falling. Unlike stocks, real estate has no automatic rebound; prices may plateau for a year or two before stabilising and rising. He expects declines to continue through all or half of 2027, which puts a real recovery around 2028. He says sales volume must rise steadily in CMHC and industry data before a turn is confirmed, since falling 'for sale' signs can reflect sellers giving up rather than a real improvement. He expects single-family homes and townhouses to recover before condos.

“2028? I don't see any chance of... the downturn stops is the first thing. The first key factor is prices stop going down.”at 33:51

Ron Butler · Butler Mortgage

Distressed Canadian condo developers pose virtually no systemic risk to the broader economy.

Asked how much systemic risk developers on the brink of default in Metro Vancouver and Toronto pose, Butler says virtually none. He cites conversations with people at banks in the group that monitors this, and says the construction loans for Toronto condos, though much larger in volume, are so far working out satisfactorily. He points to a functional Toronto market where family offices and financial holding groups buy 20, 30 or 40 unsold preconstruction condos at a time, relieving developers of their debt burden. Vancouver lacks that buying, which he attributes to it being early or prices being too high.

“Virtually none. ... And so far, it is working out satisfactorily. ... family offices and financial holding groups swooping in and buying 20, 30, 40 unsold preconstruction condos at a time and relieving... All of the debt burden from the developer.”at 39:03

Ron Butler · Butler Mortgage

Ontario's unsold condo inventory will clear over the next twelve to eighteen months.

Butler expects that the most worrisome inventory of unsold condos held by developers will eventually be cleared through a market adjustment. He describes it as a kind of clearing in which he expects Ontario to see that clearing over the next twelve to eighteen months. This follows his view that Toronto's market is functional, with family offices absorbing unsold preconstruction units, while Vancouver is not seeing the same buying.

“the most worrisome inventory of unsold condos by developers. We're probably gonna see a clearing of that in Ontario over the next twelve to eighteen months.”at 40:04

Ron Butler · Butler Mortgage

Adjustable-rate mortgage resets are not a big risk; ARMs remain a very small share of loans.

Butler says adjustable-rate products had their day just before the 2008 financial crisis, took a severe beating, and their use fell off a cliff. Even though their share is rising and more lenders market them, borrowers taking them are still a very small percentage of mortgage originations. He doesn't see the reset wave of around 3.1 million ARMs as a major issue.

“These adjustable products really had their day just prior to the two thousand eight financial crisis... the use of this product has just fell off a cliff.”at 8:07

Ron Butler · Butler Mortgage

Locked-in sub-3% mortgages keep US sellers away, so the buyer shortage pushes home prices lower.

Butler says almost 40% of US mortgage holders still have rates around 3%. Those owners won't sell and take on a 7.15% mortgage, since moving would be economically irrational. That shortage of sellers has cut the number of listings, and the imbalance between sellers and buyers is large. Buyers are also staying on the sidelines because they expect rates to fall next year. With fewer buyers, sellers have to cut prices.

“Almost 40% of the market in The US, these mortgage holders still have a mortgage rate that looks like 3%. So if you have a mortgage rate that looks like three percent, you might be very, very, very reticent to sell your home.”at 12:17

Ron Butler · Butler Mortgage

US homebuilder activity tracks resale weakness and will get worse while rates stay high.

Butler says the decline in residential completions and the drop in homebuilder stocks are correlated with the resale slump. Builders can't get past high rates with any incentives, and buyers hold off, saying they will wait to see where mortgage rates go. That uncertainty and reticence weigh on new construction, so he expects it to get worse.

“They're absolutely correlated, and they're gonna get worse.”at 14:10

Ron Butler · Butler Mortgage

Long-term bond yields worldwide will trend higher next year, pushing up mortgage rates.

Butler says fixed-income executives at major institutions in Canada and the US are very bearish on bond yields, especially long-term ones, which drive 25- and 30-year fixed mortgage rates in the US and bond yields in Canada. He says the yield trend is synchronised across the world, so the setup points to higher yields. He acknowledges the path won't be linear, with dips and jumps along the way, and that yields fell in recent sessions. But the highest-conviction view among those executives is that the trend next year will be higher.

“Their belief is, their highest conviction is, the trend next year will be higher.”at 7:29

Ron Butler · Butler Mortgage

Bank of Canada will raise rates, likely October 28 or December, to fight inflation.

Butler argues the Bank of Canada has one tool and one job, which is preventing inflation from getting out of control. Canada's inflation print was due the following Monday, and he thinks a good print is unlikely. The next print in November feeds into the December 9 meeting. Governor Macklem has moved from weak-economy talk to inflation talk, and central banks in the US, Japan and Europe have already raised rates. Butler reads this as signalling that a Bank of Canada hike is a matter of timing.

“And once he saw The US raise, the Bank of Japan raised, European Central Bank raised, He knows it's gonna happen, and it's just a question of when.”at 18:45

Ron Butler · Butler Mortgage

US rents won't fall soon; with unemployment near 4%, landlords can keep raising rents.

Butler says the US economy is in good shape and shelter data is lagging. With unemployment only a little over 4% and plenty of people working, landlords can keep getting decent rent increases. There is no reason to cut rents while people are employed and the economy is moving. He doesn't expect rent deflation for months, which he links to the solid jobs market.

“These are always lagging numbers. And I would suggest to you that in The US, we won't see any sort of [rent] devolution for months.”at 21:57

Ron Butler · Butler Mortgage

Canada's trade war threat is pressuring unemployment and weighing on housing demand; it must end.

Butler links Canada's job losses, including 68,000 jobs lost in September, to the threat of a trade war with the US. That pressure on employment weakens housing demand, since people without work can't buy homes and may move in with family. He says a resolution to the trade war is a precondition for a Canadian housing turnaround, alongside fuller employment, calmer conditions and some interest-rate relief.

“And the threat of the trade war in Canada puts a further pressure on unemployment, those job losses you talked about.”at 22:32

Ron Butler · Butler Mortgage

Big Canadian banks' mortgage underwriting has not materially tightened; rules are unchanged from five years ago.

Butler is a principal mortgage broker who says his firm is getting new mortgage approvals from banks every day. He argues there has been no material change in the underwriting of the big Canadian banks. Underwriting is no different from a year ago or five years ago, with the same rules and no material tightening in underwriting approaches in Canada's prime mortgage space. Mortgage access therefore is not tightening despite the broader stress in the market.

“I will tell you there has been absolutely no material change in the underwriting of the big Canadian banks. It's no different today than it was a year ago than it was five years ago.”at 37:23