By: Abowath

Our perspective on House prices falling by 47.9% as per CMHC

Tags: Our perspective on House prices falling by 47.9% as per CMHC

Canada Mortgage and Housing Corporation (CMHC) says house prices could fall 47.9% peak-to-trough with an unemployment rate of 25% in its worst-case scenario.

That worst case outlook is for a W-shaped recovery, which is a partial recovery followed by a resurgence of COVID-19 leading to a prolonged recession and a loss of confidence. The scenario assumptions include no government assistance, stocks and oil would fall, and four mid-sized financial institutions and one private mortgage insurer would fail.

CMHC says without government intervention in such a scenario, its solvency and capitalization would be in question. Even with help, the agency says prices would fall 31.8% and the unemployment rate would be 24.2%.

In a U-shaped scenario, which involves a steep but short peak-to-trough decline in GDP of 7% before recovery, it sees prices falling 33.9% and an unemployment rate of 14.8%.

CMHC CEO Evan Siddall made headlines in May when he forecast a decline in average house prices of 9-18% in the coming 12 months, but that hasn’t panned out so far with record price appreciation in many markets.

Types of loans most at risk

The scenarios are part of CMCH’s stress test, which it says is intended to mitigate risk.

"As we continue to deal with the impacts of the COVID-19 pandemic, it is important to monitor the evolving financial risks facing Canadian housing markets including an uneven economic recovery impacting most vulnerable populations,” said CMHC’s chief risk officer Nadine Leblanc, in a release.

“Stress testing exercises like this are an essential part of effective risk management and vitally important to the long-term health and stability of Canada's housing finance system."

CMCH also looked at current loans at risk. Oil producing provinces are at higher risk than other parts of the country. People working in the service sector are at higher risk because of steep jobs losses compared to technology, education, and government sectors. It also says 70% of its condo loans are at risk of being underwater.
Source: Yahoo Finance

And now CMHC Prediction vs our Perspective.

The above information may find some as disturbing or fear-mongering" information, but our job is to simply share information and forecasts by stakeholders in the real estate industry and that means we had to share information provided by CMHC (although they said this before - back in August of 2019 when they predicted prices were going to fall by 9-18%). We didn't believe them then, and we don't believe them now.

Although the market has been on fire lately (Yes, you heard it right FIRE! As we haven't seen this type of price increase in such a short time, ever!).

We believe the fundamentals are strong for the Canadian Real Estate market for the following reasons:

Supply Shortage - Not enough listings.

High Demand - Looks like those who were sitting on the fence have finally decided to jump in. Also, there is a high demand from Investors.

Lowest Interest Rates Ever - Today a borrower is paying more than 55% of their monthly payment towards principal . Previously this was unheard of.

Back log of immigrants waiting to get into the country - Most wants to buy.

More people working from Home - They are willing to pay premium for a nice place where they will be spending most of their time.

Social Distance - Less desire to share common areas and common air.

Don't want to miss out - They have seen their parents and family make lots of money in real estate and want to take part in its growth.

BMO Uncovers Simple Reason Canadian House Prices Now 46% Higher Than U.S.

The Canadian economy’s addiction to real estate has hit a new high.

A new report from the Bank of Montreal highlights just how intensely dependent on the housing market Canada’s economy has become. Unfazed by a global pandemic, Canada’s residential real estate sector has soared from strength to strength and now accounts for 9% of the country’s economic output, BMO chief economist Douglas Porter found.

“To say ‘that’s an all-time high’ would be an understatement,” Porter wrote. That’s well above the historic average of around 6%, Porter noted, and it’s twice the share of the economy than housing comprises in the U.S.

blog image
So, is Canada massively overbuilding houses? Apparently not. Porter found the main reason real estate is such a huge part of the economy is that people are spending a lot more on houses here than elsewhere. In fact, at this point, the cost of a house is 46% higher in Canada than in the U.S., when adjusted for purchasing power and exchange rates, Porter found.

blog image

Porter lists off several possible reasons for this huge gap, including faster population growth in Canada, slightly lower mortgage rates, and a larger share of the population concentrated in the largest and most expensive cities.

But none of that seems to satisfy, and he settles on a different explanation. “A much more fundamental answer may simply be that on balance Canadians have made a collective choice to allocate more resources to (and thus ‘consume’ more) housing than other countries,” he wrote.

In other words, we pay more for housing because we’re willing to ? because it’s worth it for us.

And if that’s the case, that may have to do with the fact that real estate has proven such a winning investment for so long in Canada.

Having avoided the U.S. housing bust of 2008, many Canadians came to see the country’s housing market as bulletproof ? a sure-fire long-term investment in a country that keeps upping its immigration levels while throwing roadblocks in the way of new construction. In fact, even as Canada headed into a winter of lockdowns and even curfews in some places, confidence in the housing market soared to its highest level on record in the Bloomberg-Nanos consumer confidence index.

That may have to do with the fact the average resale price of a house jumped 17% over the course of 2020, to a record high of $607,280. If the worst economic shock in decades can’t stop the housing market, what can?

Porter doesn’t see Canada’s obsession with housing as necessarily a bad thing ? just a consumer choice. “Who is to judge if this type of consumption is better or worse than other forms of spending?” he asked.

However, he notes this type of consumption comes with a big asterisk: debt. Amid soaring house prices, Canadians have become among the most indebted people in the developed world.

“The focus will revert to this underlying issue when the pandemic eventually fades as economic concern number one,” Porter predicts.
Source: HuffPost

What are your thoughts? Share in the comments below.

Have further question about real estate?

Need help with real estate buy or sell? We are with you every step of the Way!

Call the Abowath Real Estate Group TODAY!