Industry recovery a year away, CMHC says
Forecast ‘a little on the pessimistic side’: Numbers likely to remain low until 2022
TORONTO Construction of new housing will be slashed by at least half this year as prices and sales on existing homes plunge due to the economic shock from the coronavirus pandemic, the Canada Mortgage and Housing Corporation predicted in its housing market outlook released Wednesday.
Housing starts, prices and sales won’t start to recover until mid next year, with levels likely to remain below pre-pandemic levels until 2022, according to the forecast, which is admittedly “a little on the pessimistic side,” CMHC chief economist Bob Dugan said on a conference call with media.
“We don’t expect this to be a very quick recovery from COVID-19,” he said.
The CMHC blamed massive declines in employment — three million jobs disappeared across Canada in March and April — along with drops in economic activity due to stay-at-home orders, a halt to immigration and lower oil prices for the additional risks to the housing market.
The CMHC predicts housing prices will fall between nine and 18 per cent from pre-pandemic levels, with prices falling as much as 25 per cent in oil-producing provinces Alberta and Saskatchewan.
Sales volumes are expected to fall between 19 and 29 per cent as potential buyers stay home instead at a time when social distancing makes it tough to look at homes and uncertainty makes them more inclined to wait before a big purchase.
Reduced construction activity means housing starts could drop from 51 to 75 per cent, with the CMHC predicting housing starts will bottom out this summer before gradually recovering.
The wide difference between the optimistic and pessimistic scenarios reflects the uncertainty caused by the pandemic, Dugan said. The Bank of Canada’s range for economic predictions is even wider, he added, noting the CMHC based its evaluation on the more pessimistic half of the bank’s forecast.
“This is really our best guess,” he said. “We think this is a pretty good assessment of the evolution of housing markets and the economy in the next couple of years.”
The CMHC took a less rosy outlook than some of Canada’s largest banks and its real estate industry. That’s in part because the job losses reported so far don’t account for the volume of people who have lost work hours and a portion of their income since the onset of the pandemic, Dugan said. While it’s not clear how many laid off workers are homeowners, housing is tied to employment across the country.
The CMHC’S worst-case scenario, which would involve a second wave of the virus and subsequent shutdowns, considered what would happen to mortgage payments if the spell of unemployment lasts longer than six months. Banks have introduced six-month mortgage deferrals during the pandemic, with an estimated 12 to 14 per cent of households taking them up on the offer so far, Dugan said.
But if people don’t get their jobs back, they may be forced into foreclosure on their homes. An increase in foreclosures could make banks reluctant to lend and freeze liquidity. Something would have to give to avoid this, Dugan said, whether that’s additional government support or the banks agreeing to longer-term mortgage deferrals.
Realtors have criticized the CMHC’S forecast as too pessimistic given the resilience of the housing sector during the pandemic so far.
“CMHC doesn’t seem to understand the sheer number of sellers that would have to accept this kind of price reduction, in order for average housing prices to plummet to this degree in such a short time span,” Re/max’s Christopher Alexander, executive vice-president and regional director for Ontario and Atlantic Canada, said in a blog.
“Sellers simply won’t accept that kind of discount on their listings. A statement of this nature is panic-inducing and irresponsible.”
Housing prices have remained relatively stable during the pandemic so far as supply and demand moved in lockstep with a coinciding drop in listings and buyers — resales plummeted 57 per cent from March and new listings 56 per cent.
“To date it hasn’t created market imbalances. In fact, the relationship between demand and supply has changed little since February both nationally and in most local markets,” said Royal Bank of Canada analysts in a note. “What was tight remains generally tight and the few soft markets didn’t get much softer. This explains why home prices haven’t cratered in the face of generational low levels of activity.”
Still, the bank expects demand-supply conditions to deteriorate and downward price pressure to build somewhat.