If you hear “2001”, your mind probably thinks 9-11. If you hear “1930s” you probably think of the great depression or dirty thirties. When you hear “2008” your mind might go to the financial crisis. What will our mind go to when we hear “2020”, in 10, 20, or 30 years? COVID-19? Probably! What about the housing market?
During the current pandemic, we have heard a lot about the rough economic times. A lot of which has been centered around the stock market correction. And rightly so. The correction that was experienced had some historic characteristics. However, the Canadian housing market hasn’t been sailing on smooth water during this time.
In the article that follows we look at the current Canadian housing market. This includes things like mortgage debt, housing starts, price changes, and other stats.
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Housing Market Leading into 2020
Going into 2020, the Canadian housing market continued to rise. Average prices were climbing, and with it, mortgage debt.
After the mortgage stress test was implemented in 2018, people assumed it would deter housing purchases. Although it had that effect at first, it seems as though people have become accustomed to it.
Between Q4 2018 and Q4 2019, mortgage debt rose 5.2% to $1.341 Trillion. The increase in mortgage debt is significant compared to non-mortgage debt which increased just 2.7% during that time.
The average national mortgage reached $289,000 an increase of 7.2% year over year. That in and of itself is a large chunk of change, however, we feel sorry for Toronto and Vancouver residents. The average mortgage increased to $448,000 (8.5% increase), and $455,000 (7.4% increase) respectively. The 8.5% increase in Toronto is the highest increase on record.
With property prices and mortgages values continuing to increase, delinquency rates were on the rise too. The mortgage delinquency rate finished 2019 at 0.18%. Low compared to historical standards but still trending upwards. This trend will probably continue as people are having more difficulty paying debts due to rising unemployment.
Bill Johnston, vice-president of Data and Analysis at Equifax Canada said this; “… These trends are likely to continue for much of 2020, assuming no major change in economic conditions or interest rates.”
Well isn’t that good? It’s not like we have had a global pandemic that has had significant economic effects, and interest rates have been lowered to practically 0%. Oh wait… we did.
Housing Market During COVID-19
As noted above, housing was in a decent place going into 2020; people were feeling confident taking on mortgages and property values were increasing. Housing actually looked really good in January and February as well. Since then, however, it has been trending downwards.
The decrease from March to April was 12.4%. Although this wasn’t as big of a decrease as expected, it was still the lowest reading since February of 2019.
Canadian Real Estate Association (CREA) paints a pretty dismal picture for April as well. National home sales fell by more than 56% month over month, and year over year from April 2019 to April 2020 actual activity was down 57.6%. In addition, newly listed properties decreased 55.7% from March to April, and sale prices year over year in April fell 1.3%. To read CREA’s report Click Here.
This decrease in sales is not surprising from most points of view. Remember that interest rates have decreased substantially. This makes borrowing easier in some aspects. Had this not been done, who knows, home sales may have fallen even more.
The Future of the Canadian Housing Market
I have heard it said that the Canadian housing market is much like the U.S. stock market. In Canada, so many people have their retirement savings and net worth tied up in their houses. This is much like the stock market in America. This means that the Canadian government can’t let the housing market collapse. Or if they do, a lot of people will not have retirement savings and the government will have to bail them out.
Whether or not the government bailing out the housing market is good or bad, is irrelevant. A lot of people including Canadian Mortgage and Housing Corporation (CMHC) believe that housing could fall significantly.
According to an article on The Globe and Mail, CMHC believes that home prices could fall up to 18% and mortgage arrears could rise to 20%. An Arrear is money that is owed and should have been paid previously.
CMHC’s predictions are pretty grim. Several economists for the big Canadian banks don’t see a decline of that magnitude coming. Rather they see decreases in the 5-10% range as more likely.
If a decline of 18% were to happen, it would far surpass previous housing market declines. The worst of which was felt in the early-80s and mid-90s when the average price fell by 5%.
A decline of this magnitude is still a possibility, and many Canadians fail to even consider the possibility that housing prices can decline. Common advice is to buy a house young and you’ll be set. There is no way you can lose money. Wrong!
What happens when you take out a mortgage but then the value of the house falls? Nothing if your planning on staying in the house and can afford the mortgage. However, sometimes life happens and you are left with few choices other than selling the house and moving.
Furthermore, although home values have increased throughout history, it is not a guarantee. Yes, history can give us a lot of information, but past events are not a guarantee of what the future holds. Just like investment managers cannot say “This fund had a 20% return last year, so there is a high chance it repeats.” We’ll emphasize it again, past events do not dictate the future and home values can decline.
So you bought a house last year for around the national average price, $500,000. You only put down a minimum of 5%, $25,000. So your mortgage is $475,000 at 3.25% interest with a 25-year amortization (this does not include the additional 3% CMHC insurance).
This means your mortgage payments were roughly $2,300/month. Now let’s say after owning the house for 1 year you now have $450k left on the mortgage. However, now housing prices have declined by 15%. Your $500k house is now valued at $425k.
Life maybe got a little messy and maybe your marriage is failing, or you lost your job, had medical issues, etc. Or maybe you have to move to another city for your job. Either way, you’re forced to sell the house.
Let’s say you get lucky and get your asking price of $430k. Well, the bank still wants its outstanding $450k. So you have to come up with an additional $20,000 somewhere. That doesn’t include realtor fees, lawyer fees, inspections, moving costs, etc.
Housing prices and sales have been hit hard thus far in 2020. Going forward, we can expect much the same. How long it will last is hard to say.
The longer people are left without real income (not helicopter money) the harder it will be to meet debt obligations. As more people begin to miss mortgage payments lenders may start to foreclose.
This means more houses potentially on the market. But since people have less money to spend, and a global pandemic in the rearview mirror people will be less likely to purchase houses. Higher supply and lower demand mean lower prices.
Let’s hope that the housing market doesn’t collapse. Furthermore, that government doesn’t have to step in and bail out the housing market.
If you’re concentrated in real estate, now may be a good time to diversify. Contact us, we would love to sit down and help you devise a plan to achieve your financial goals. The old adage is to buy low, sell high. Well, stocks had a dip of ~35% earlier this year.
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