As I mentioned in my last newsletter issue, it is quite a task to separate fact from fantasy. Again, I have two perspectives to offer, both from qualified and credible sources:

1. The Upside

“Job losses not likely to impact housing activity”

In a recent article in Mortgage Broker News, Christopher Alexander, Exec. VP and Regional Director, RE/MAX of Ontario-Atlantic Canada, opined that job losses caused by Covid-19 will not have a significant impact on real estate activity.

“A major reason for this is the fact that the ones most likely to buy homes are the ones that have mostly retained their purchasing power”, Alexander told BNN in an interview.

“Unlike the past recessions and most recently, the housing crisis in the United States in 2008, most of the people losing their jobs [due to the pandemic] are in the service industry and aren’t necessarily in the home-buying space,” Alexander said. “Many executives and professionals still have their jobs. Some of them have had to take a reduced pay, but they seem to be willing to make that buying decision. We’re seeing signs of this not just in the marketplace but online on our website and from consumer behaviour. All things are pointing improved activity across the board.”

Alexander said that prices in most Canadian markets are expected to remain at elevated levels largely due to low supply and accelerating demand.

“I think that is going to continue for the foreseeable future. We’re seeing signs right across the country, outside of parts of Alberta, where there’s just not enough inventory to keep pace with demand,” Alexander said. And even if the pandemic ultimately lowers the number of actual home buyers, mounting demand in late 2020 should offset this weakness.

“Exceptionally low inventory in much of Canada may also contribute to upward price pressure as restrictions ease and demand increases further,” RE/MAX said in a separate analysis. “As cities slowly begin the reopening process in the coming weeks, there is likely to be a transition from the uncertainty around the home-buying journey that was seen early on in the COVID-19 pandemic, to an increased comfort level among consumers and real estate agents when it comes to adopting new buying and selling processes.”

2. The Downside

“Canada’s housing sector indicators, including prices, sales and home starts, aren’t expected to return to pre-COVID levels until at least the end of 2022”. 

– According to a new report in Canadian Mortgage Trends, CMHC’s latest Spring Housing Outlook.

“Following large declines in 2020, housing starts, sales and prices are expected to start to recover by mid-2021 as pandemic containment measures are lifted and economic conditions improve,” said the housing agency’s chief economist, Bob Dugan. “Sales and prices are likely to remain below their pre-COVID19 levels by the end of our forecast horizon in 2022,” Dugan added, while admitting the “precise timing and speed of the recovery is highly uncertain.”

The report reiterated the agency’s forecast that house prices could decline anywhere from 9-18%, adding that oil-producing regions could see declines up to 25%. Sales, meanwhile, are expected to fall 19-29% this year from pre-COVID levels due to job losses.

“Our forecast is a little on the pessimistic side…it is just a very tough time for the economy,” Dugan told BNN Bloomberg.

Meanwhile, many banks have forecast home price declines of closer to 10%, including CIBC economists who said earlier this month they expect prices to fall between 5% and 10% before starting to recover.

In a recent report, CIBC economists Benjamin Tal and Katherine Judge noted there are “clear early signs that the market is starting to wake up,” with activity in the first two weeks of May “notably stronger” compared to the first two weeks of April.

Delinquencies Expected to Rise – ‘missed mortgage payments’

Credit monitoring agency, TransUnion Canada has revised its 2020 Credit Forecast to account for the impact of COVID-19. The agency now expects the national mortgage delinquency rate (those who fall 90+ days behind on their mortgage payments) to rise to 0.9% by the end of the year. That’s triple the delinquency rate of 0.3% reported in both Q4 2019 and the first quarter of 2020.

Non-mortgage delinquencies, such as credit cards, auto loans and other personal loans, are expected to top 6.3% by year end, a moderate increase from 5.6% in Q4 2019 and 5.8% in Q1 2020.

According to a recent article in Mortgage Trends, Evan Siddall,  head of the Canada Mortgage and Housing Corporation delivered a particularly gloomy forecast while testifying remotely before the House of Commons Finance Committee on Tuesday. Among those predictions:

  • Home prices could fall from their peak by 9% to 18% over the next year
  • Mortgage deferrals could jump to 20% from 12% by September
  • Mortgage arrears could top 20% [Update: On May 25, 2020 in a series of Twitter posts, Siddall clarified his reference to a 20% arrears rate: “12% of mortgages are in deferral; that could be 20% by Sept. Deferred mortgages are not in arrears since they are deferred with lender…That 20% is *at risk* of being in arrears 90 days after a required payment is missed.”]
  • Canada’s debt-to-GDP ratio is estimated to rise from 99% pre-COVID to 130% by Q3. The debt-to-disposable income ratio “will” soar from the current 176% to 230% through 2021.
  • Canada’s prime rate falls

All of this could happen “if our economy has not recovered sufficiently,” according to Siddall.

Siddall also hinted at a policy change of raising the minimum down payment to 10% from 5%, saying it would offer “more of a cushion against possible losses”

“The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s longer-term financial stability,” he said in his prepared remarks.

He added that a “debt deferral cliff” is coming this fall when mortgage payment deferral programs come to an end and people need to start making payments again. As a result, CMHC said mortgage arrears could soar to 20% of all mortgages. In comparison, the Bank of Canada currently expects the arrears rate to peak at 0.80% by the third quarter of 2021.

You be the judge!