The impact of COVID-19 is leading to many comparisons with the financial recession of 2008. The comparison has many would-be and existing homeowners wondering about the impacts to the housing market. The understandable anxiety of “will my mortgage balance be more than my home is worth” leads to another question. Many Canadians are asking “should I be worried about house prices decreasing?”

The short answer is “it’s complicated”, but there is plenty of evidence suggesting things may not be so dire. At the time of writing, prices are currently increasing. The CMHC expects a partial recovery in mid-2021, which will continue into 2022. These are not promises, and unforeseen circumstances can always change the outcome. For now, at least, evidence indicates we will survive if there is in fact a housing bubble.

Are house prices decreasing?

This year August saw a 33.5% increase of home sales in Canada. This is likely due to home buyers who were unable to purchase during the spring lockdowns. The average home price in the GTA during August 2020 rose 11.1% while the average across Canada rose 18.5 % above pre-pandemic levels. The rising prices may be concerning. However, a slower fall market should stabilize the prices and prevent significant drops in price levels. Property values also depend heavily on property type. Condos in Toronto tend to be lower in price compared to previous years, with buyers opting for larger properties that offer more room. So it’s important to look at the market as a whole to understand what’s happening.

Is there a bubble?

An economic bubble is defined by inflating the value of an asset, in our case real estate, due to factors outside the assets’ intrinsic value. Canadian real estate pre-Covid-19 saw an increase of 88% from 2005-present. The increase of demand creates a sellers’ market for both residential and rental properties. To reduce the impact and likelihood of a bubble, the Canadian Federal Finance Minister in 2017 levied foreign buyer’s and speculation taxes. The Ontario provincial government also took initiative to regulate the market with the Fair Housing Act. A lot of these efforts are to prevent the bubble effects and to stabilize the market.

Will Covid-19 Burst the Bubble?

Like most things financial, it’s complicated. Think of the real estate market as a Jenga tower. Each brick moved, for better or worse, can impact the tower. Just as a brick like inflating prices or a lock down can destabilize the tower, there are bricks that can stabilize. The Canadian Government put a few stabilizations in place to prevent the tower from falling. Such as the CERB and mortgage deferrals.

We saw a decrease in home sales during the nation-wide lockdown in March. However, the dismal spring became a booming summer. There were more residential sales in July alone than any quarter since 2015. High demand may keep prices higher long enough for the decrease to be more gradual than a sudden fall. That being said, it matters more that we can survive the bubble-burst than if it does. 

The Market Will Recover, We Will Survive

Canadians fared much better than our neighbours during the real estate crash south of the border in 2008. One of these supporting factors comes down to banking regulations in Canada. Many US banks offered subprime mortgages, and homeowners found themselves in negative equity positions. Negative equity is when you owe more on an asset than what it is worth. In contrast, Canadian banks placed limits on debt ratios and enforced stricter criteria for borrowers. Other measures were taken to ensure the Canadian Real Estate market survived the crisis. The circumstances behind the financial crisis of 2008 and the one we face now are different. However, this does show our ability to recover from crises.

What are Experts Saying?

According to the CMHC, prices are expected to fall 9-18%, but they also predict a recovery to begin in mid-2021 and into 2022. This is hopeful as both TD and RBC predict a V-shaped recovery. This means that after the prices gradually fall, they will gradually rise as Canadians invest in the market responsibly once more. 

It’s hard to predict exactly what is going to happen with the market, but with some level of confidence experts agree that a decline will not last forever and that the decline should be gradual minimizing the impact to you.

Other Factors?

The Real Estate Market is Currently 10.1% of our national GDP, and the Canadian government has a lot of incentive to prevent it from crashing. If we return to the Jenga Tower analogy, there are ways we can stabilize the tower with carefully placed bricks. As referenced before, the two main bricks relevant to us are the CERB and mortgage deferrals. These prop up the Jenga tower, at least in the short term, because of how they keep Canadians able to pay the bills.

Deferrals are very short-term, as the back pay will be included in interest once your mortgage payments resume. In the meantime, this will help some Canadian home-owners from defaulting on their mortgages and reduce the number of foreclosures.

CERB is a stabilizing brick because it enables Canadians to participate in the economy during mass-lay-offs. This contributes to the Real Estate Market by allowing renters to pay rent, contributing to income properties, and home-owners can maintain their homes.

It Will Be Okay

If house prices decrease, it won’t be forever. During the decline we have systems in place to withstand it. Experts predict that a recovery to begin in 2021-22, and there are still buyers capable to participate in the market. There are no guarantees that everything will be okay, but we can take comfort in the current projections!

If you are worried about house prices decreasing, or would like advice on your mortgage application, give me a call at (705) 333-4338 or get in touch with me here!

Customer Service Numbers:

CMHC: 1-800-668-2642
Genworth: 1-800-511-8888
Canada Guaranty: 1-866-414-9109

ATB: 1-800-332-8383
B2B: 1-800-263-8349
BMO: 1-877-895-3278
Bridgewater: 1-866-243-4301
CIBC: 1-800-465-2422
CMLS: 1-888-995-2657
Optimum: 1-866-441-3775
Equitable: 1-888-334-3313
Connect First: 403-736-4000
Chinook Financial: 403-934-3358
First Calgary Financial: 403-736-4000
First National: 1-888-488-0794
Haventree: 1-855-272-0051
Home Trust: 1-855-270-3630
HSBC: 1-888-310-4722
ICICI: 1-888-424-2422
Manulife: 1-877-765-2265
MCAP: 1-800-265-2624
Merix: 1-877-637-4911
Marathon: 1-855-503-6060
RBC: 1-866-809-5800
RFA: 1-877-416-7873
RMG: 1-866-809-5800
Scotiabank: 1-800-472-6842
Servus: 1-877-378-8728
Street Capital: 1-866-683-8090
TD: 1-866-222-3456