Last month CMHC made the headlines by releasing its forecast, including their prediction that real estate prices could fall as much as 18%. Media outlets quickly gobbled up this news story, further stimulating the cautious sentiment of many prospective home buyers and sellers currently in the market.
Could real estate prices really fall 18%? What would have to happen to the current real estate market for this to happen? And what do you need to keep in mind if you’re buying or selling real estate in the next few months?
Firstly, let’s talk about what CMHC is. The Canadian Mortgage and Housing Corporation is a government run mortgage insurer that provides mortgage insurance to home buyers with less than 20% downpayment. CMHC insures mortgages against default due to non-payment.
It would only make sense that the government run underwriter or mortgage insurance take precaution as the real estate market experiences its present challenges. As part of their initiative to navigate the current market challenges, they studied the market and forecasted a price decline of anywhere from nine percent to 18 percent over 12 months.
Why is this significant?
If you are a first time buyer with only 5% downpayment, and you purchase a $500,000 condo, you would need to put down $25,000.
If that condo’s price falls 10%, or $50,000, the value would be $450,000. The price decrease would exceed your downpayment, wiping out your equity and putting you ‘underwater’ (meaning your mortgage would be higher than the actual value of the condo itself).
CMHC wants to protect its portfolio of insured mortgages. Since putting forth this forecast, it has changed its underwriting practices. This affects first time buyers and any buyers purchasing with less than a 20% downpayment.
Some of the changes include:
- Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to 35 and 42 respectively
- Establishing a minimum credit score of 680 for at least one borrower; and
- Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
This affects the borrowing power and the ability to qualify for many buyers looking to enter home ownership.
It’s not necessarily a bad thing. Responsible financing practices should be taken into consideration by home buyers especially amidst the current real estate market conditions.
Other mortgage insurers such as Genworth (a private residential mortgage insurer) did not change its underwriting practices, making it possible for some lenders to still have buyers qualify under the present criteria.
But let’s set aside the technicalities of mortgage insurance right now, and go back to the question: will prices drop 18%?
Let’s look at some data.
The Toronto Regional Real Estate Board recently released May 2020’s market statistics.
Sales are down 53.7% (4,606 sales in May 2020 vs. 9,950 in May 2019), but new listings are also down 53.1% (9,104 in May 2020 vs. 19,394 in May 2019) and active listings are down 42.8% (11,448 in May 2020 vs. 20,017 in May 2019).
This has resulted in the average price inching upwards 3%, sitting at $863,599 in May 2020 vs. $838,248 in May 2019.
It’s taking a bit longer to sell real estate in this current market, taking as much as 32 days when using the ‘property days on market’ metric (how long the actual property sits on the market taking into consideration if it is listed multiple times).
Why is it that, in spite of lower sales, average price continues to climb, albeit slowly?
It’s because the pace of sales is similar to the pace of new listings coming to the market, and active listings staying on the market.
Supply has dropped, but so has demand. This is keeping prices stable for now.
Month over month, sales have increased by 55.2% from April 2020 to May 2020.
This is a positive sign that buyers are entering the market again.
Using this data — we ask the question again… could we see an 18% decline in prices?
We should rephrase that question — what would have to happen in order for prices to drop 18%?
Supply would have to increase drastically over demand.
The number of sellers putting their homes and condos for sale on the market would have to jump at a rapid pace, ‘decoupling’ from demand (as this RBC article puts it).
As supply increases while demand remains the same (or starts to decrease), you’ll start to see price affected.
It’s economics 101. When supply is greater than demand, prices go down.
When we start to see listings outpace sales, we’ll start to see prices drop.
However, we’d need to see a great increase in listings and a great decrease in sales to see prices drop as much as 18%.
What could possible contribute to an increase in supply or listings of properties for sale?
The first reason is a delay in the spring market. We typically see an increase in listings (and in sales) around March and April. This year, due to the COVID-19 pandemic resulting in a provincial lockdown in March, listings didn’t come out as they would usually do.
Since the lockdown, we’ve started to see an increase in listings (and in sales as well) week over week. But we may be reaching a point now where listings start to increase rapidly over sales, and the absorption rate (how quickly new listings are purchased by buyers… or ‘sales to new listings ratio‘) will start to decrease.
Another reason is mentioned in the RBC article I linked to earlier pointed out: the winding down of financial support programs. The Canada Emergency Response Benefit and the mortgage payment deferral programs are, as we currently know it, coming to an end. Soon.
When financial support runs out, and then deferred mortgages have to be paid in September (and remember, by then they would have been deferred by six months)… what happens then?
Could inventory jump as homeowners who can’t afford to sustain their house payments start to list in July and August to cover the deferred payments?
Time will tell if this is the case. But if it does happen, and if inventory fills the real estate marketplace, buyers will have so many options to choose from, multiple offers will die down, and sellers will be forced to adjust their prices if their properties don’t sell.
It may be early on to tell if this will happen.
And right now there is a great opportunity for sellers to take advantage of the low competition in the marketplace.
As we look back at April 2020 numbers, active listings amounted to 10,561 while sales numbered 2,975. A total of 6,174 new listings came to the market that month.
In May 2020, active listings increased by 8.39% to 11,448 while sales jumped 54.8% to 4,606, and a total of 9,104 listings came to market which is an increase of 47.45%.
We’re seeing the spring market unfolding right now.
Supply and demand are fairly in step with each other.
An 18% drop in price doesn’t seem likely — but remember, CMHC’s prediction was a drop within 12 months.
While we can’t pull out a crystal ball and predict what will happen, we know what to look out for.
We’ll watch the supply levels to see if they outpace demand.
And we’ll monitor what affect that will have on prices.
As of right now, prices are increasing slowly, the market is busy, multiple offers are still happening — and inventory is low.
If you’re planning to sell a house, now might be the time to do it.