After Four Rate Cuts, Who is Real Estate Investment in Canada Best Suited For?

This topic was suggested to me by a radio journalist, and it’s a question on many people's minds following recent rate cuts. Real estate investment often relies on loan support, with approval contingent on income. As employment conditions deteriorate, households’ borrowing capacity weakens. Additionally, high interest rates are forcing many families to deleverage, focusing solely on debt reduction and leaving little room for investment plans. So, who is real estate investment in Canada best suited for? The answer: it’s suitable for everyone, at least during certain periods of their lives. A qualified real estate investor is someone with low consumer debt and income that meets the bank’s loan criteria.

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The issue of income inequality has been widely discussed in various fields. I align with the perspectives of American economist Thomas Sowell and Professor Zhang Weiying, who argue that comparing individuals' incomes should consider lifetime earnings rather than income at a single point. A person’s earnings at 25 may differ significantly from their earnings at 52. Comparing a 25-year-old's income to that of a 52-year-old and declaring inequality between them is meaningless. Similarly, instead of asking who is best suited for real estate investment, it’s more relevant to consider the conditions that make someone a suitable investor. Those who meet these conditions are well-suited for real estate investment. Like Sowell’s research suggests, 50% of Americans have at least some period in their lives when they are in the top 10% of income earners. I’ve noticed that many people unfortunately miss their ideal time to invest in property, which can lead them to become disillusioned with real estate and even derive satisfaction from hoping for price declines.

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Identifying the periods in one's life best suited for real estate investment, along with the necessary conditions, is the topic of our discussion today. Moreover, macroeconomic policies significantly impact the job market, which in turn affects people’s ability to invest in real estate. The current employment situation in Canada will also be a key focus of this article.

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01 Overview of Canada’s Current Employment Situation

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When a country’s job market is booming, the job vacancy rate rises, while the unemployment rate falls. The relationship between job vacancy rates and unemployment rates can be illustrated on a curve, making it easier to predict changes in unemployment based on shifts in job vacancies. The U.S. welfare system, from cradle to grave, was pioneered by Franklin D. Roosevelt, and shortly after, the UK developed its own welfare system, designed by William Beveridge. Beveridge also discovered the relationship between job vacancy rates and unemployment, which is now known as the “Beveridge Curve.” Beveridge, an influential British economist from the 1930s, was a contemporary of Hayek, Keynes, and Laski and had a significant impact on the development of post-war British economic policy. Currently, the U.S. Federal Reserve closely monitors the changes in the Beveridge Curve to inform its interest rate decisions. Historical trends suggest that when the job vacancy rate drops from a peak to 4.5%, the unemployment rate remains relatively stable; however, when it falls below 4.5%, even a slight decrease in job vacancy can lead to a sharp increase in unemployment. With the U.S. job vacancy rate currently at 4.6%, the Fed is concerned that delaying rate cuts could trigger a significant rise in unemployment.

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After the pandemic, Canada’s labour market experienced a surge, with the job vacancy rate peaking at 5.6% in Q2 of 2022, while unemployment reached its lowest point at 4.8%. Canada’s job vacancy rate then fell rapidly, hitting 4.5% in Q3 of 2023, coinciding with the Bank of Canada’s tenth rate hike. The Bank of Canada’s last rate hike, in July 2023, disregarded the Beveridge Curve’s 4.5% warning threshold. This rate increase effectively accelerated the rise in Canada’s unemployment rate, which has since climbed rapidly to 6.5%, with the job vacancy rate dropping to 3%. Former Bank of Canada Governor Stephen Poloz describes the central bank’s mandate in his new book The Next Age of Uncertainty as maintaining a “home” zone of 5%-6% unemployment and 1%-3% inflation, with policy adjustments consistently aimed at this range. The current Bank of Canada governor, however, seems unable to find that balance.

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The current 6.5% unemployment rate is well above the central bank’s target range, and the reality may be even grimmer than the numbers suggest. The unemployment rate doesn’t account for self-employed individuals, who aren’t classified as unemployed even if they have no income; thus, the 6.5% figure excludes income-less self-employed individuals. This aspect of the job market invites closer examination.

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In addition, the rise of gig work is an unstoppable trend in the job market. The term “Gig Economy” describes a situation where individuals spend as much time looking for work as they do working, with unstable incomes, no professional affiliation, limited benefits, and a lack of work-life balance. In the U.S., the share of gig workers rose from 10% of the labour force in 1990 to 30% in 2021. This phenomenon is concerning, as many young Canadians who found stable jobs during the recent employment boom are now facing a new reality: after a year of aggressive rate hikes, many have graduated only to find themselves unemployed and joining the ranks of the gig economy. Additionally, some self-employed individuals are struggling to adapt to declining income and are finding themselves in increasingly precarious situations.

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Some financial analysts on television are forecasting a bleak scenario, with an 8% unemployment rate in Canada by the end of 2025. Although I am not as pessimistic, I believe it is likely that the unemployment rate could exceed 7% by the end of next year.

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02 Who is Unsuitable for Real Estate Investment in Canada?

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Simply put, people with unstable incomes are not suited for real estate investment. For example, imagine a self-employed individual who earned $300,000 in 2021 and wanted to apply for a mortgage to buy a home. However, because their income was low in 2020 and 2019, they couldn't get a loan and ended up signing a pre-construction contract for $1.2 million. Now, with an income of just $30,000, they face challenges closing the purchase as the market value has dropped to $1 million. Although this scenario is hypothetical, it is representative of many real situations.

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On a more complex level, individuals who cannot integrate into the “social contract” are also unsuitable for real estate investment. In Canada, people are free to choose their income sources, so there's no concept of being underappreciated — one’s earnings are a reflection of their abilities and choices. Stable jobs provide security but limit freedom, while self-employment offers freedom but lacks security. In this seemingly free environment, however, the social contract is inescapable. Jean-Jacques Rousseau, the author of The Social Contract, famously said, “Man is born free, and everywhere he is in chains.” The social contract is the set of rules individuals must follow to participate in a mutually dependent society — this includes the bank's lending criteria.

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Banks have different standards for recognizing income depending on its type. For salaried employees, banks recognize income based on pay stubs and employer letters, as long as they’ve passed a probationary period. Self-employed individuals, on the other hand, must show tax returns for the past two years in the same line of work to prove income stability. Although Canada’s mortgage regulatory standard (B-20) doesn’t mandate a two-year income history for the self-employed, major banks have adopted this standard uniformly. Canada’s oldest bank, founded 207 years ago, predates Canada itself by 50 years. This long history has led banks to set stricter income requirements for self-employed individuals. In my article Analysis of Canadian Loan Policy Directions and the Social Contract (February 6, 2023), I explored the link between lending policies and the social contract in detail. My intention is not to discriminate against the self-employed but rather to convey the social contract inherent in the bank's lending criteria. Many of my clients are self-employed, and they’ve met the more stringent income requirements. Modern finance provides many options, but the 2008 subprime mortgage crisis in the U.S. was a hard lesson, making banks more cautious. Nevertheless, some non-bank institutions still offer loans to individuals who don’t meet bank standards. According to Landlord Network data, in June 2024, 437 properties in the Greater Toronto Area were auctioned by lenders, with 77.8% of those auctions initiated by non-bank financial institutions, while major banks and mortgage insurers accounted for the remaining 22.2%. These figures illustrate that the high standards of major banks contribute to the stability of the real estate market, whereas bypassing these standards poses significant risks to both lenders and borrowers.

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The “chains” Rousseau referred to can be translated into economic terms as “taxation.” In a society built on interdependence, everyone must contribute through taxes as proof of their social existence. For employees, long-term employment contracts simplify income verification, so banks tend to be more lenient. For self-employed individuals, however, who determine their own taxable income, banks have higher requirements. Thus, whether employed or self-employed, the “chains” are the same — banks evaluate taxable income. Many Millennials and Gen Z individuals are reluctant to accept the constraints of the social contract, making it harder for them to secure loans. Gig workers face similar challenges. However, these “chains” are unavoidable; even when renting, landlords often check income records. The author of On Borrowed Time describes gig workers as “denizens” — a term referring to those with partial rights, similar to new immigrants or non-residents who often encounter social barriers and discrimination.

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In summary, people with unstable incomes or those unwilling to accept the social contract will find it challenging to secure a mortgage. Those with both unstable incomes and a reluctance to accept the social contract are the least suited for real estate investment. Experience has shown that obtaining a mortgage outside the usual criteria is very risky. Not only does it create negative externalities for the real estate market, but it also poses significant risks to the financial security of borrowers themselves.

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03 Who is Real Estate Investment Suitable For in Canada?

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From a mortgage approval perspective, qualifying for an investment property loan has become more challenging. It now requires: 1) a stable, verifiable income; 2) low consumer debt, including primary mortgage, car loans, and student debt; 3) sufficient liquid assets, not just for the down payment but also to handle potential negative cash flow on an investment property; 4) high-net-worth financial assets to support the loan if income is insufficient; and 5) basic financial common sense, such as understanding the implications when signing a pre-construction contract.

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Since starting my work in mortgages in 2009, I’ve observed mortgage approval standards becoming progressively stricter, not necessarily because of increasing credit risk but due to the ongoing tightness of housing supply. Stricter lending requirements filter out more borrowers. Meanwhile, more people are joining the gig economy, making it harder to meet bank loan criteria. Canada’s housing ownership rates, captured in five-year census intervals, reflect a steady decline, showing that homeownership is becoming more challenging. After a brief post-pandemic recovery in the job market, high interest rates have once again curbed long-term employment security. More employers are now reluctant to hire full-time staff, resulting in more people becoming “the three no’s”: no stable income, no permanent job, and no assets. To qualify for a mortgage, individuals must first establish stable, verifiable income. Those who deliberately choose to step outside the social contract will find themselves among the “denizens” with limited rights, including restricted access to mortgages.

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Canada’s household debt-to-GDP ratio is 160%, compared to 90% in the U.S. As a result, Canadian households feel the impact of rate hikes more acutely. Since starting this blog in 2018, I’ve consistently advised readers to pay down primary residence debt first. Until they have fully repaid their mortgage, I suggest they avoid investing in RRSP retirement accounts, instead focusing on eliminating their primary residence debt as quickly as possible. Since rates began climbing, many families now understand why I recommended this approach. My advice to accelerate paying off primary residence debt is based on personal experience and insights from Rich Dad Poor Dad. In the book, “Poor Dad” takes on more debt to upgrade homes during good income years but fails to pay it off before retirement. I read Rich Dad Poor Dad 20 years ago and focused not just on becoming “Rich Dad” but on avoiding the mistakes of “Poor Dad.” In Canada, if a household’s primary residence debt exceeds twice its income, qualifying for an investment property loan becomes difficult. Therefore, families looking to invest in real estate should aim to reduce primary residence debt.

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Negative cash flow on an investment property isn’t necessarily a problem. In fact, it’s often expected, especially in Canada’s largest cities, where a 20% down payment typically results in negative cash flow unless illegal subletting occurs. Negative cash flow can be seen as a way of financing the down payment in installments. Banks will only approve a mortgage with a 20% down payment if they believe the borrower can withstand this cash flow deficit. Conversely, families who can’t sustain negative cash flow are unsuited for real estate investment in major cities.

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Home prices and interest rates are high. Banks now frequently offer high-net-worth lending programs to boost a buyer’s borrowing capacity. For instance, if a household qualifies for a $350,000 mortgage based on income but has $150,000 in assets, the bank may approve a $500,000 loan. However, if income is low, the asset requirements become significantly higher — for example, requiring high-net-worth assets exceeding the loan amount. These programs are intended to supplement insufficient income but offer little help to families with very low income.

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Common sense is essential for real estate investors. Like a farmer signing a forward contract to sell grain, they understand the commitment: the grain must be ready to fulfill the contract in the following autumn. There are two types of forward contracts: the “forward contract,” which is typically non-transferable, and the “futures contract,” which is standardized and easily traded. Farmers often sign forward contracts that are difficult to resell, meaning they almost certainly have to deliver the grain rather than profit from selling the contract itself. Some, however, take on forward contracts without planting seeds, betting on selling the contract at a higher price. Similarly, pre-construction buyers in Canada sign forward contracts rather than futures contracts. Those who buy pre-construction without a plan to move in or rent out the property face significant, uncontrolled risks. As the author of Stop-Loss states, “Many people think they’re investing when they’re speculating; many think they’re speculating when they’re gambling.” This year, Canada’s pre-construction market has left many “farmers” with unhedged bets on high-risk contracts, facing potential losses.

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A self-employed person earning $300,000 in 2021, for example, would have been wise to buy a resale home within their means in 2022 rather than signing a high-priced forward contract at their peak income.

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04 Will Real Estate Investments No Longer Offer the Returns They Once Did?

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Many people are skeptical about real estate investment. Some are qualified borrowers but avoid investing due to uncertainty, while others have missed their chance to invest and often voice skepticism about real estate, sometimes stemming from envy of current investors.

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Since interest rates have risen, financial pressures on property investors have noticeably increased. Some are questioning whether holding onto their properties is worthwhile, while others, who’ve lost confidence, are putting their investments up for sale. This reminds me of a scene from The Big Short: as the subprime mortgage crisis was brewing, default rates on mortgage-backed securities were rising, but bond ratings weren’t reflecting this risk. Investors who had “shorted” the bonds were suffering huge monthly losses. Two groups of short sellers attended a Las Vegas conference to see firsthand what those betting on the opposite outcome were like. After assessing, they strengthened their conviction, increased their positions, and ultimately profited greatly when the crisis hit. When uncertain, sometimes the best way to assess your position is to look at who disagrees with you. This is a valuable lesson I took from the film. When I’m unsure about holding property long-term, I’ll check out opposing views online. If I see rational, well-supported arguments, I might consider selling. But if I see mostly emotional venting, it strengthens my conviction to hold.

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Over the past 30 years, Greater Toronto home prices have risen from $275,000 to $1.2 million, an average annual growth rate of 4.78%. Using this rate, prices in 30 years could reach $4.86 million. Many people are skeptical about such growth, just as people 30 years ago doubted prices would rise over fourfold. Let’s analyze why home prices could grow at an annual rate of 4.78%. In the past 30 years, Canada’s M2 money supply has increased by 8.2% annually, GDP by 2.2%, and CPI inflation by 2%. If we subtract the inflation rate (2%) and GDP growth (2.2%) from the money supply growth (8.2%), we get 4%. This excess 4% flows into asset prices beyond inflation and economic growth. With a preference for real estate, Canadians tend to direct more money into property, and in fast-growing regions like Greater Toronto, home prices have increased at 4.78% annually—slightly above the average asset price growth of 4%. Since CPI doesn’t capture asset prices, rising home prices reflect currency devaluation rather than income levels.

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With rising interest rates, Canadian government bond yields have surged, increasing debt interest payments. Higher rates also mean greater losses for the central bank, which will need fiscal support. Unemployment has slipped beyond controlled levels, tax revenues are declining, and many in the gig economy face precarious work without reliable tax contributions. This situation inevitably places more burden on government pension funds. To address these challenges, the government may either raise taxes substantially or increase money supply. Expanding the money supply further seems the most viable option, and if so, home prices are likely to rise along with it.

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If more money is on the way, the best approach is to get “more boats” to stay afloat. Everyone has the chance to finance these “boats” (properties), but the ability to seize this opportunity depends on how well one aligns with the social contract. Fewer families will qualify for investment property loans, but those who do will hold more properties, consolidating ownership among those with borrowing power rather than distributing it more broadly. Inevitably, landlords will attract envy.

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Conclusion:

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Real estate investment is suitable for every family, but few qualify as ideal investors. Each household must assess and seize opportunities wisely. The income criteria enforced by banks won’t change—they’re part of a social contract that isn’t easily altered. Lowering income standards for lending, as attempted in the U.S., proved disastrous, and neither Canada nor other countries are likely to repeat this mistake. The bar for qualification is rising, excluding more families; those who can meet these standards will continue to invest and accumulate wealth through real estate, building a more secure future for themselves and their descendants in an uncertain world.

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Real estate investment is often an envy-inducing endeavor, and landlords need to be prepared for that reality. The conditions for investment—boosting income, reducing consumer debt, fulfilling social responsibilities, and applying common sense—are also foundations for a good life, worth every family’s pursuit. As we face an increasingly uncertain future, each household must rise to the challenge of securing its own destiny. Reducing life standards is not the ideal response. May every reader find the strength to persevere and succeed as a real estate investor. Real estate in Canada is your Noah’s Ark—it’s worth owning.