CIBC Released their “In Focus” report on May 1st entitled “COVID-19 and Housing: What to Expect”. In summary, it states the housing market is currently “frozen” due to reduced transactions representing largely forced deals, which gives little useful interpretive information. They assume there will be a slow economic recovery in the initial stages after stores and restaurants reopen, potentially the second wave of infection and reimplementation of social distancing, and general market volatility until a vaccine is available to the public.
Post-COVID-19 Recession
When we finally find ourselves recovering from the pandemic, it will be into recessionary conditions. Unemployment rates have risen from 5.5 to north of 13 %. Many small businesses will close permanently and some of the temporary layoffs will not be reemployed.
The Bank of Canada has taken unprecedented action to lower borrowing costs and inject liquidity into the system, but the cost of borrowing “is secondary in an environment of low confidence, increased unemployment and slower income growth.”
Housing Starts
National housing starts, especially in the anticipated high-rise developments in the GTA market, are stalled due to developer’s difficulties to secure trades, overseas shipments of essential building materials and on-site social distancing regulations. CIBC suggests site productivity is down 40 % which will dramatically impact completions in 2020.
Through every recession over the last 30 years, housing starts in Canada never fell below 100,000. CIBC postulates the projected 200,000 housing starts may dramatically fall below this barrier in 2020 with a partial recovery in 2021.
Forced Sales and Price Declines
CIBC expects forced sales will offset the reduced supply of new units. We at BCRET do not agree. We think most BC residents will do what they must to try and hang on to the security of their homes, meaning forced sales will not factor as significantly into available supply. CIBC’s economists expect to see average prices 5-10% lower relative to 2019 levels, with greatest price declines in the high-rise segment of the market. Our view is the lack of supply will float housing prices for a longer than currently anticipate. However, the dramatic increases for condo insurance will put downward pressure on expensive high-rises and older buildings.
Mortgage Growth Will Slow and Arrears Increase Moderately
Reduced levels of housing market activity mean fewer new mortgages, though refinancing activity is expected to increase. The elevated debt levels will amplify the shock when job losses mean more mortgages in arrears. CIBC expects the rate of arrears to approach 0.4 % as unemployment rises above 8%. However, the effects will not be felt until later in 2020 and early 2021 until after deferred payments – currently between 10-15 % of borrowers – has run the course.
Read the full report HERE