Canada Mortgage and Housing Corp: House Prices To Decline 9 – 18%

The Canadian Mortgage and Housing Corporation (CMHC) has recently issued an update regarding its ongoing efforts in the Canadian housing market as well as Canada’s overall financial system.

Prior to the onset of the economic crisis stemming from the coronavirus pandemic, the CMHC has decided to bring back the Insured Mortgage Purchase Program as a means of alleviating some of the financial pressure that banks have been faced with. Under this program, the CMHC will be able to purchase upwards of $150 billion worth of insured mortgages, as well as be able to increase the delivery of conventional securitization programs.

Furthermore, CMHC, along with private mortgage providers, has allowed mortgage holders to defer their payments up to six months – with approximately 12% of borrowers already entering forbearance. In addition, the CMHC is also responsible for distributing the federal government’s Canada Emergency Commercial Rent Assistance aimed at small businesses. Under this program, qualifying businesses are able to to forgo 75% of their rent.

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However, given these circumstances, CMHC is predicting that household debt will soon significantly increase. Eventually, the mortgage holders currently in forbearance will have to start making mortgage payments again, which by then there will already be an excessive debt-deferral cliff mounting. As a result, household debt could reach 115% of GDP by the second quarter, and go as high as 130% of GDP by the third quarter of 2020. To bring those figures further into perspective, prior to the coronavirus pandemic, the level of gross debt to GDP was only at 99%.

The Bank of International Settlements sets the critical ratio of when national debt begins dragging down GDP growth at 80% – a ratio which will surely be surpassed given the direction of current levels. When such high debt ratios are present, then future consumption is diminished, and is instead allocated towards debt service payments.

But that’s not the worst of it. CMHC is also anticipating that house prices will also decrease substantially. Over the next 12 months, average housing prices could decrease anywhere between 9 to 18% – meaning that those individuals locked in mortgages prior to the pandemic will be subject to a decrease in their home’s value.

As a result of an impending increase in household debt, as well as a substantial decrease in housing values, which are all fueled by increased unemployment rates, the CMHC is concerned with the country’s financial stability in the long run. Therefore, the CMHC will be reducing its available borrowing, and will instead be taking action to increase the supply of rental housing through the National Housing Strategy. The CMHC’s efforts to make rental housing more available will be coupled with the federal government’s contributions towards affordable housing, which is expected to be in the billions of dollars.

Information for this briefing was found via the Canada Mortgage and Housing Corporation. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.