Real estate resilient during COVID-19 but CMHC warns about debt’s effect

(Canadian Press)

Home prices are holding up during the coronavirus pandemic despite lockdowns.

The most recent sign of resiliency comes from the Teranet-National Bank House Price Index for April, a composite of 11 major markets, is up 5.3 per cent from a year earlier. 

It’s up 1.3 cent compared to the previous month, but the report’s authors acknowledged prices could fall in the months ahead.

“Among the 11 Indexes included in the composite index and the 14 other indexes available, April showed the fewest monthly declines (two out of 25) since last June,” read the report.

“This could obviously change with the economy now thrown into recession by the public-health measures taken to contain the spread of the Covid-19 virus.”

(Teranet-National Bank House Price Index)

John Lusink, president of Right at Home Realty, also says COVID-19’s effect on home prices has been minimal and sees room for prices to eventually come down.

“For the upcoming months, a significant increase in unemployment rates and the inability for many consumers to meet the criteria to qualify for mortgage loans could put downward pressure on house prices, changing the landscape for Canadians looking to purchase a home,” he said

Right at Home’s data collected weekly from our network of over 5,000 Realtors showed a 54% decline in incoming transactions from across our 12 locations in Ontario month to date.

Lusink says he expects the housing market to rebound at the end of summer as social distancing measures continue to lift.

Another sign that buyers still have an appetite for real estate comes from the Toronto Regional Real Estate Board (TREBB). A new survey found 27 per cent of respondents said they were likely (very likely or somewhat likely) to purchase a home in the next 12 months. 

That’s lower than the same time last year (31 per cent), although TREBB says it’s relatively in line with the five-year trend. But, according to the survey, those buyers shouldn’t expect a flood of properties from desperate sellers to hit the market because only 17 per cent said they planned to sell, compared to 32 per cent last year.

For now, mortgage deferrals mean owners can hold on to their homes and government financial assistance can help those whose income has taken a hit to keep their heads above water. But when those programs end, the Canada Mortgage and Housing Corporation (CMHC) says our addiction to debt will come back to haunt us.

“Looking at debt multiples of disposable income, that measure will climb from 176 per cent in late 2019 to well over 200 per cent through 2021,” Evan Siddall, CHMC CEO, said during testimony to the House of Commons finance committee Tuesday.

“Moreover, CMHC is now forecasting a decline in average house prices of 9 – 18 per cent in the coming 12 months. The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s longer-term financial stability.”

The Bank for International Settlements says a debt-to-GDP ratio above 80 per cent acts as a drag on economic growth. Prior to the pandemic, Canada’s was 99 per cent. Siddall says he expects increasing borrowing and a declining GDP to push it up to above 115 per cent in Q2 2020 and 130 per cent in Q2. 

Siddall also proposed raising the minimum downpayment on a home from 5 per cent to 10 per cent to avoid exposing young people to losses from falling home prices.

Karl Schamotta, Chief Market Strategist at Cambridge Global Payments, says since Siddall’s term is coming to a close at the end of the year, his words should be taken with a grain of salt. Schamotta sees two possibilities. 

“Siddall could be right, and we see a price drop that depresses growth and generates major headwinds for the Canadian dollar, or - just as in 2008 - policymakers could blink and inject enough cash to stabilize prices and kick the can further down the road,” said Schamotta.

“We need to consider both, but given Canada’s highly-oligarchic financial system and political structure, the latter seems like a very real possibility.”

CMHC is also calling for urgent action to accelerate the supply of rental housing.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

Download the Yahoo Finance app, available for Apple and Android.