Banks Outlook for Real Estate

Although several forecasters predict the Canadian housing market will be severely impacted by the pandemic, the country’s largest banks seem to have a more positive outlook on things.

Forecasters at UBS Group AG, Moody’s Corp. and even the Canada Mortgage and Housing Corporation (CMHC) believe that a housing correction could be on the horizon, with significant price declines over the next year. However, Canada’s six largest lenders are only predicting slight price decreases of about 3%, on average. In fact, the Bank of Montreal expects no change in average real estate values.

One of the primary reasons for the disparity in predictions is the data these organizations look at. Many forecasters use high-level economic and demographic figures that seem to suggest a mismatch between prices and current income, immigration and employment trends. For example, Moody’s predicts a 7% price decline.

In a report released in May, CMHC, Canada’s housing agency and main mortgage insurance provider, forecasted an average home price of $460,292 for Q1 2021. Since August’s average home value was $586,000, prices would need to decrease 21% by the end of next March to meet the expected forecast.

The organization has recently noted that April data was used for the original estimate, so things may be slightly less concerning in the near future, based on more recent information.

Even so, according to John Aiken, analyst at Barclays Plc, a 20% housing price decrease would likely only have a significant effect on banks if there was also a marked increase in unemployment that meant borrowers couldn’t pay their mortgages. This too would only be somewhat problematic, as banks are often well set up to weather loan losses, and CMHC or other providers insure many of their mortgages.

To make their predictions, Canada’s big banks rely heavily on internal customer data, like money flow in consumers’ chequing accounts and the number and size of mortgage preapprovals.

All in all, housing is an essential earnings stream for banks, so the trajectory of housing prices will be critical over the next year. According to the Canadian Imperial Bank of Commerce (CIBC), residential mortgages make up about 40% of the six largest Canadian banks’ loans. At the end of July, this accounted for about $1.13 trillion in Canadian residential mortgages.

Shifts in the Housing Market
The downtown cores of major cities like Toronto show the most significant housing stress signs, with excess inventories of condos for sale.

Otherwise, most of the market, including single-family homes, has experienced price increases, even in times of recession. For example, the average price of a detached house in Toronto increased to $1.18 million in September, up 17% year-over-year. Even smaller cities and towns have seen boosts in prices, some of more than 20%.

Toronto, the country’s largest housing market, was ranked No. 3 on the Real Estate Bubble Index released by UBS last month. Using factors such as construction levels, GDP and price-to-income ratios, the index looks at which global cities pose the highest risk of property-price bubbles.

Employment & Immigration
Banking experts who say the housing market will rebound quickly believe that decreases in jobs and immigration related to the pandemic will be short-lived. They also note that COVID-19 has made homes more valuable since people are now working and learning, in addition to living in them.

A survey conducted by PwC in July showed that 59% of Canadians were working remotely, and only about 20% of them said they wanted to return to their workplace full-time if the pandemic eased.

As well, 64% of people working from home said they didn’t feel comfortable or weren’t sure if they were comfortable returning to their external workplace. This suggests employees may be working remotely for the foreseeable future, and their homes will play an essential role.

On the other hand, other experts believe economic issues resulting from the pandemic will cause continued high unemployment and low immigration numbers. And as immigration helps boost real estate demand in general, the market should experience a downturn because of this.

While banks and other forecasters seem to have different opinions on what the future holds for Canadian real estate and the economy in general, most acknowledge that the pandemic significantly impacted both and that it will take a bit of time for things to recover. It remains to be seen just how long this recovery will take.

Leave a Reply

Your email address will not be published. Required fields are marked *