Bond Market Crashes; Your Home Is Next | Ron Butler

Ron Butler · Butler Mortgage

Canadian small condos are the most beaten-up real estate category and will keep under pressure.

Ron defines the 'dog crate' condo as under about 500 square feet, often 385 to 425, with a poor layout in a weak building. He says these units face enormous pressure from falling prices, rising property tax and condo fees, and higher mortgage rates. Those factors will do more damage to the segment. He calls it the most beaten-up single category of real estate in Canada. He also says the difficulties with tiny condos will last well past the recovery in ground-based homes.

“They are under enormous pressure and will continue under pressure and higher mortgage rates will just do more damage to that marketplace. It is certainly the most beat up single category of real estate in Canada.”at 17:48

Ron Butler · Butler Mortgage

Ontario and BC landlords face negative cash flow and falling rents; they should sell even at a loss.

Ron says many rental-property owners in Ontario have negative cash flow while property values fall. Expenses are rising, including property taxes, mortgage rates and condo maintenance fees. Asking rents have fallen for 24 straight months nationally, especially in Ontario and BC. That combination squeezes landlords with no offsetting rent growth. He concludes that owners should sell soon, even at a substantial loss.

“People better get serious about selling these things even if they're gonna take a substantial loss.”at 19:10

Ron Butler · Butler Mortgage

Canadian forced sales set new comps 8-10% below prior lows, dragging whole regional housing markets lower.

Ron has tracked court-ordered and power-of-sale foreclosures. He says these sales consistently clear 8-10% below the lowest previous sale, because lenders want the lowest possible bids. Each one creates a new comparable sale for the neighborhood, and the whole region then drops in value. He says this has played out consistently and has gone on for almost a year. Financial pressure has been grinding for a couple of years, so he expects it to last another year or two. This pushes more owners to walk away, feeding the cycle.

“And yet once that sale takes place, which is, again, 10% lower than the last lowest sale, it creates a whole new set of comps for the neighborhood, and the whole region drops in value.”at 25:02

Ron Butler · Butler Mortgage

Ending Canada's foreign buyer ban won't lift home prices; the buyer demand isn't there.

Ron says provinces with large foreign-buyer taxes, including BC and Ontario, will not drop them. Those taxes will deter buyers even after the federal ban ends. Foreign demand has also shrunk, because the Chinese property market has collapsed and it was mainly Mainland Chinese buyers before. Buyers also do not want to catch a falling knife. He says there is no line of waiting buyers and virtually no interest, so any idea of an immediate price rise is 'hopium'.

“Anyone who feels that the end of the federal home buyers ban will cause an immediate upward movement in home prices, we say that those people are smoking the hopium pipe.”at 28:10

Ron Butler · Butler Mortgage

Canadian home prices will plateau through 2027, with single-family and townhomes recovering first.

Ron says a recovery starts only when prices stop falling. Prices then plateau, perhaps for a year or two, before stabilization and real rebounds. He expects falling prices to continue through all or half of 2027. Recovery requires an end to the trade war, fuller employment, calmer buyer sentiment and some interest-rate relief. Pent-up demand is strongest for ground-based homes, so single-family and townhomes should recover first, then trade-up buyers, with condos lagging. He also cites 2028 as a rough recovery marker.

“And I see that that will probably continue either through the whole of '27 or through half of twenty seven.”at 32:30

Ron Butler · Butler Mortgage

Ontario's unsold developer condo inventory will clear over the next 12 to 18 months.

Ron says developers' unsold condo inventory is the most worrisome part of the market. He says that inventory is starting to clear in a way that will eventually stabilize things. The clearing is already visible in Toronto, where family offices and holding groups are buying 20 to 40 unsold preconstruction units at a time and absorbing the developer debt. He expects a similar clearing in Ontario over the next 12 to 18 months. Vancouver has not yet seen the same buying.

“But we're actually seeing what will eventually be a kind of clearing in 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 36:55

Ron Butler · Butler Mortgage

Adjustable-rate mortgage resets are not a big issue, as ARM use is a small share of mortgages.

Ron says ARMs had their day just before 2008, then took such a beating that their use fell off a cliff. Even as more people market and take them today, borrowers using ARMs are still a very small percentage of the mortgage-acquiring public. He does not see ARM resets as a big issue. He pushes back on the concern that a large share of the roughly 3.1 million ARMs will reset soon, since they are a small slice of about 55 million active mortgages.

“And even today, when it's increasing, when there's more people marketing it and there's more people taking it, that people taking it are still a very, very small percentage of the mortgage acquiring public.”at 7:27

Ron Butler · Butler Mortgage

Buyers sitting out high mortgage rates will keep pushing US home prices down, despite few sellers.

Ron says about 40% of US mortgage holders have rates near 3%, so they will not sell and take on a 7.1% to 7.3% mortgage. That lock-in creates the shortage of sellers. But with buyers also priced out, the buyer-to-seller ratio is badly skewed. Because many buyers are out of the market and expect rates to fall next year, the few who would buy are not present and prices fall. He adds that builders' incentives cannot overcome the high rates, so construction is hit even harder than resale.

“So yeah, I'm just out of the market. And if you're out of the market as a buyer, prices come down.”at 12:25

Ron Butler · Butler Mortgage

US rents will not fall for months; a strong jobs market lets landlords keep raising rents.

Ron says the US economy is in good shape and shelter CPI reflects lagging numbers. With unemployment around 4%, many people are working and landlords can keep getting decent rent increases. He sees no reason for landlords to cut rents while people are employed and the economy is moving. He expects no rent decline in the US for months.

“And I would suggest to you that in The US, we won't see any sort of [rent] devolution for months.”at 20:01

Ron Butler · Butler Mortgage

Long-term bond yields are set to rise next year, with fixed-income executives highly convinced of the trend.

Ron says fixed-income executives at Canadian and US institutions are increasingly bearish on bond yields globally, especially long-term yields. Those yields drive US 25- and 30-year fixed mortgage rates and Canadian bond yields. He says all bond yields will be higher next year and central banks will keep raising rates. He concedes yields will dip and jump day to day, and that recent falls in the 10-year do not change the trend. The synchronized global setup, in his view, makes the direction of government bond yields 'kinda clear'.

“The layout, the trend, the whole setup synchronized across the world for bond yields, government bond yields seems to be kinda clear at this point. ... I just think the setup is for higher higher bond yields.”at 5:14

Ron Butler · Butler Mortgage

Bank of Canada will hike rates on October 28 or December, as its inflation pivot is clear.

Ron argues the Bank of Canada's only job is to contain inflation, and its only tool is the policy rate. He says the upcoming Canadian inflation print is unlikely to be good and another print in November will influence the December 9 meeting. He points to Governor Macklem shifting from talking about a weak economy for about a year to talking about inflation in a Halifax speech. He notes the US, Bank of Japan and ECB have already raised rates, so he expects the Bank of Canada to follow and says it is only a question of timing.

“These people know how to signal their future moves. ... 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 16:42

Ron Butler · Butler Mortgage

The US-Canada trade war is pressuring Canadian jobs and making buyers nervous, weighing on housing.

Ron ties the trade war to Canadian unemployment, pointing to recent job losses. Threats of a trade war add pressure on jobs, and some people who lose work will move back with parents or couch surf. Without work, paying rent or a mortgage is hard. He also says the trade conflict makes homebuyers nervous and holds back prices. He sees the end of the trade war as a prerequisite for a housing turnaround.

“And the threat of the trade war in Canada puts a further pressure on unemployment, those job losses you talked about.”at 20:31

Ron Butler · Butler Mortgage

Big Canadian bank mortgage underwriting is unchanged, and developer defaults pose virtually no systemic risk.

Ron says he gets approvals from banks every day, and big Canadian banks' prime mortgage underwriting is no different from a year or five years ago, with no material tightening. On developers in distress in Metro Vancouver and Toronto, he says systemic risk is virtually none. He cites conversations with bankers who monitor the issue. Construction loans in Toronto are much larger, yet the outcome so far is satisfactory. Toronto has a functional market in which family offices and holding groups buy batches of unsold preconstruction condos and absorb developer debt. Vancouver lacks that buying, which he attributes to early days or higher prices.

“I will tell you there has been absolutely no material change in the underwriting of the big Canadian banks. ... Virtually none.”at 35:22