May 11, 2022
On Thursday January 21st, 2021 the earth shook for the real estate industry in Canada. Canada Mortgage and Housing Corporation (CMHC) published their own stress test of its capital and liquidity levels in various pandemic scenarios going forward.
All the media outlets, be they online and/or offline, had a single theme of disaster in the Canadian real estate market. The headlines read that recovery could be ‘Very Severe’, there will be ‘Dire Effects’, we could see ‘House Prices Fall by 50%’ and there is a ‘Growing Risk’ in the Canadian Market.
To say I received a few calls and one or two texts over the weekend following this announcement would be an understatement. I have to say that I was pleased that so many of our REALTORS® were engaged in this announcement, and wanted to find answers and data to counter or explain what CMHC was alluding to.
As you can see by the CMHC chart above, they have 2 theories of a recovery as it pertains to the economy as a whole and how that will impact our industry.
Scenario 1: A ‘W’ economic recovery - down…up…down…up
Scenario 2: A ‘U’ shaped recovery - sharp down…gradual leveling off…sharp up.
CMHC’s worst case scenario, without any government support and a catastrophic cyber attack, would see a 47.9% decrease in property values (from peak to trough) in the W-shaped scenario, and a 33.9% decrease if the recovery is U-shaped.
This begs the following question. How many times has CMHC been right? All we have to do is look at their last Pandemic report in the summer of 2020, when they retracted their prediction…or did they simply correct it?
“CMHC predicts home price declines in major cities, but retreats from earlier forecast of 18% plunge”
The revised statement was as follows. ‘Prices could decline as much as 12% over the next 18 months before recovering in 2022.' Maybe they got their numbers mixed up, and instead of an 18% decline in next 12 months they meant 12% decline in 18 months. A simple typing error????
Do you think these people at CMHC ever look at the Canadian Real Estate Association’s (CREA’s) Home Price Index (HPI)? The HPI is probably our most effective tool as a REALTOR®. It will help us put the CMHC prediction in perspective. Have a look at the examples of percentage appreciation over time in our various markets (see button below). As you can see, over the last 12 months there have been a significant percentage increase in many of our markets. If we took the CMHC percentage decrease and divided it in half (approximately 24%), in most of our markets that decrease would translate to a rollback in sales prices back to February 2020 levels. Is that really so bad? And let us be clear, most buyers who bought in 2020 will not be selling in 2021 or 2022 or 2023 for that matter.
The 2020 and 2021 real estate market was, and is going to continue to be fueled by the 1st time move-up buyer and the 2nd time move-up buyer. All you have to do to be successful in the next 90 days is call your database and ask one question…”Do you still love your current home?”
Last but not least, CMHC always ignores the one major fundamental - HOUSEHOLD CREATION vs Residential Units Built. In the United States back in 2006-07, there was an oversupply of housing which lead to the crisis of 2008. In other words, housing unit creation/supply outstripped demand. During the 3 year period from 2006-2008, 3.1 million single family homes were constructed, yet only 1.54 million households were formed. I do not have to remind everyone what this oversupply meant to the US economy moving forward.
Let us examine what is happening in several municipalities in Ontario, which reflects the reverse of what happened in 2006-2008 in the US. In the City of Hamilton for instance, the population growth is projected to spike by 230,000 people over the next 30 years. 30 years may seem like forever, but at the pace we are going when it comes to residential unit creation, we are going to see a situation in housing that has never been experienced before. And the current market conditions are the tip of the iceberg. In 2020 there were 2500 new residential units added, with over 1000 of those being apartment units. We have gone from 10% apartment unit creation to 50/50 apartment to homes on the ground. In 2020 there were 130 site plan applications, a decline from 179 in 2019.
How can CMHC, in good conscience, not factor these numbers into there grandiose predictions? It is simply Economics 101 - supply and demand. And, once we re-open immigration, the stress on supply will be unprecedented and what does that lead to?