Ah, the Canadian housing crash. Always just around the corner, yet never seeming to materialize. People write and talk about the derailing of the real estate gravy train so frequently that a person could be forgiven for thinking some portion of the population is secretly rooting for it to happen.
So, what then to make of Lowestrates.ca’s report: Will the Canadian Housing Market Crash in 2021?
To the credit of authors Lisa Coxon and Zandile Chiwanza, the report tries to present the possibility of a housing crash from opposing angles – one arguing the unlikelihood of a crash and the other saying a crash has “already started”.
Why a crash isn’t likely
For the pro-crash perspective, Coxon and Chiwanza lean heavily on the fact that both corporations and households are more indebted now than they were in 1990, the last time the Canadian housing bubble was said to have popped due to a recession. While debt levels in Canada are far higher today than they were 30 years ago, interest rates are also far lower. According to Statistics Canada, the conventional rate on a five-year mortgage was 13.35% in 1990, which would give borrowers far less breathing room in the case of financial disruption. And lest we forget, the recession triggered by COVID-19, deemed “the deepest but shortest recession in history”, is technically already over.
Even taking into account the inflated prices homeowners are paying now compared to 1990, few experts see a wave of delinquencies, defaults, or foreclosures hitting the Canadian market in 2021.
“Generally speaking, we’ve seen a flat pattern coming out of [mortgage] deferrals in terms of consumer delinquency overall,” Matt Fabian of TransUnion told MBN. “Certainly, with mortgages, we’re actually seeing a little bit of a drop in delinquency rates.”
But Coxon and Chiwanza argue that the end of programs like mortgage deferrals and government wage subsidies leave the market at risk. They turn to Hilliard MacBeth’s, author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash, comments on the condo market for confirmation that trouble is already brewing.
“‘It’s showing up in the condo market first,” it is stated. “There’s a huge surplus in the condo market, both on condos for rent and condos for sale. And then related to that, there’s a huge number of new purpose-built rentals either on the market or are about to hit the market.’”
Here is where theories of a market crash typically start breaking down, in this author’s opinion. They assume, possibly because Canada’s population is as modest as it is, that the Canadian real estate market is a tiny, self-contained ecosystem where a single pollutant can contaminate the entire thing. That’s not the case. There is no “Canadian real estate market.”
The condo market and the detached market are entirely separate entities. The price of one does not directly impact the price of the other. Sure, if home prices grow too quickly buyers will be forced to start purchasing condos, a trend that will drive condo prices up; but the phenomenon doesn’t work the other way. If condo prices fall, that has no impact on the prices of other housing types. Has anyone reading this article seen evidence that Canada’s falling condo prices slowed the growth of townhouse, detached, or semi-detached prices in 2020?
It’s also important to keep in mind that local real estate markets in Canada are insulated by geography. Falling home prices in Alberta, for instance, will not affect prices in any other province. Why would they?
A nationwide housing crash would require a financial calamity – think 2008 in the US – that threatens the livelihoods (and mortgages) of many of the country’s homeowners, forcing tens of thousands of them spread across every major Canadian real estate market to sell their homes simultaneously, thereby dragging home values down in each one. Those values would then have to be brought low enough that homeowners holding on to their properties would see the entirety of their equity wiped out and be forced to sell into a tanking market. That’s not likely to happen in communities where home values have risen by 5-10% annually over the last several years, and there is no shortage of those.
To be fair, MacBeth isn’t the only person expecting prices to drop. The Real Estate Investment Network recently released a report encouraging investors to prepare for a rise in delinquencies and foreclosures in the third quarter of 2021.
“Housing prices are the last to be affected,” by factors such as decreased economic growth, higher unemployment, and falling immigration numbers, REIN’s Jennifer Hunt said. “They’re lagging indicators. So yes, you’re seeing in many cities in Canada these frothy markets. But that’s exactly the behaviour we look for in a market that is entering a slump.”
A more probable outcome
Even LowestRates.ca CEO Justin Thouin isn’t expecting anything resembling a crash to hit Canadian real estate in 2021.
“Personally, I don’t think we’re going to see a crash,” Thouin told MBN, but added that the amount of debt being carried by Canadians does pose a threat to their ability to pay their mortgages.
“If I were to be most concerned, it would be in the prairies, specifically in Alberta, where the economy is far worse off than the rest of Canada,” he said.
In Thouin’s opinion, low interest rates will continue protecting homeowners from delinquency, while the rebound in immigration and employment expected by many in 2021 should help the economy recover from what has already been almost a full year of COVID-19-related nausea.
This more optimistic view is the predominant theme in LowestRates.ca’s report, which includes Moody’s Analytics economist Abhilasha Singh’s view that home prices in Canada could fall this year, but only by 5% or so.
“‘We expect home prices to fall,’ said Singh. ‘But the recovery is going to be very quick, especially after looking at the results of the vaccines.’”
She told LowestRates that a crash isn’t on the cards.
“We are expecting a modest correction,” she said. “But not a crash.”