CMHC forecasts a major drop in housing prices

BY JAY BRIJPAUL

Canada Mortgage and Housing Corporation (CMHC) is a branch of the government that acts as Canada’s national housing agency with a precept to help Canadians access affordable housing options. According to CMHC, the pandemic is affecting the housing market and home prices may drop as much as 18% over the next year.

Many businesses are still closed, some permanently, resulting in major job losses. Approximately 25,000 immigrants migrate to Canada each month. Immigrants would either buy or rent their first home, resulting in higher home prices and escalating rent. With COVID-19, immigration has stalled, and with travel restrictions and social distancing, tourism has suffered. Thriving businesses, such as Air BNB, are feeling the bite. Over half a million homeowners have taken mortgage deferrals, buying themselves six months of time. Soon those six months will be over, and many will be forced to sell their homes. The negative financial undercurrent is strong and home prices will begin to tumble. CMHC recently changed its underwriting policies for insured mortgages in order to reduce risk.

CMHC’s CEO, Evan Siddal, mentioned that “COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians.” As of July 1^st, CMHC has limited the Gross/Total Debt Servicing (GDS/TDS) ratios to 35/42. In this case, a family who earns a gross income of $100,000 can use a maximum of $35,000 to pay for their mortgage and property tax yearly. The total payment for mortgage, property tax and other debts must not exceed $42,000. With the new guidelines, at least one borrower must have a credit score of 680 and above. “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth,” according to Evan Siddall.

June was hot for real estate, partly because many buyers were in a rush to beat the CMHC deadline. Many sellers have postponed their decision to sell because of the pandemic. The lack of fresh supply in the industry has once again created an atmosphere for bidding wars. This is not sustainable. By September, many families will be at the end of their ropes. The combined effects of job loss, deferred mortgages, drop in immigration, lack of new foreign students, an ailing tourist industry and seasonal workers will result in a massive increase in vacant rental properties. The financial dam will break, creating an avalanche, and home prices will crash.

There are many COVID-19 vaccines on trial. When the pandemic subsides, the economy will rebound. It is estimated that the drop in home prices will be short lived, lasting only six months to a year. Some people may not recover financially while others will stay afloat. There are always opportunities in a declining market.

First time buyers should be patient. It is best to work with a realtor and get approved for a mortgage, then, look at various options. Sally, a first-time buyer, could afford to buy a home for $400,000. Her first choice was Toronto. However, she could not find a home within that price range. She chose to buy a newly built detached home within her budget out in Barrie. This decision was easy because she has the ability to work from home.  Natasha, on the other hand, had to postpone her buying and wait for a price correction.

Those who are selling and buying can also plan their move accordingly. In a declining market, it’s best to sell first with a long possession date and buy later. This way, a seller can take advantage of the lack of inventory and sell at a higher price. With a long possession date, the seller waits for prices to drop before they buy. It is advisable to ask for a strong deposit. This will deter buyers from walking away from a contract in the event the market collapses. Some sellers choose to sell with a quick closing date and rent back on a month to month basis. By doing so, they know that their home is sold, and their money is secured in their account.

Investors can benefit as well. Sofia took a line of credit on her current home. She plans to use a portion of the funds to buy an investment property when the market changes. Her philosophy is: “buy when everyone wants to sell and sell when everyone wants to buy.”

This pandemic is a turning point in human civilization. It is certain that we will experience more outbreaks. Social distancing will make homes in the suburbs more demanding than crowded condos. Now more than ever, the best investment on earth is earth.