Waiting for the real estate rebound

Real estate investors will likely have to wait a couple of years for the market to rebound from the effects of the Covid-19 pandemic, a CIBC economist says, as unemployment and reduced immigration hit housing prices.

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Katherine Judge, economist at CIBC World Markets, said she expects “a very bumpy road for housing for the rest of this year and into 2021.”

That means prices falling between 5% and 10% from pre-virus levels through next year, she said in a May 26 interview. The luxury condo market will be especially hard hit as demand shifts to cheaper units, she said.

Sales of residential properties in May were up from a record low in April, but were still down almost 40% year over year, the Canadian Real Estate Association reported last week. The national average price was $494,500, down 2.6% from May 2019.

The Canada Mortgage and Housing Corp.’s (CMHC) outlook released last month said average housing prices could fall anywhere from 9% to 18%, and as much as 25% in oil-producing regions.

The agency warned of foreclosures if unemployment remains high and bank loan losses increase.

Earlier this month, the CMHC tightened its lending standards by increasing the credit score needed for mortgage insurance and limiting debt service ratios.

Judge noted that the Bank of Canada’s response to the crisis contributed to lower mortgage rates and increased liquidity. Even before the CMHC’s actions, though, she said the rate environment would only go so far in boosting the housing market.

“You have to remember: in this environment of very low confidence, elevated unemployment and slow income growth, the interest rates are always a secondary factor,” she said.

Judge also warned about more mortgages in arrears when the federal government’s mortgage deferral program winds down, since unemployment will likely remain high.

While the real estate market will return to “normal functioning” next year, the recovery will take place in a “recessionary environment where demand won’t be what it was pre-virus,” she said.

“The market will get back to better functioning, but prices will still be 5% to 10% lower in that period of time. We don’t think it’ll be until 2022, when the unemployment rate falls further, that we would see any improvement in the housing market,” she said.

On the rental side, Judge pointed to fewer immigrants impacting demand. While immigration should rebound once travel restrictions are removed, the number of foreign students won’t recover as quickly, she said.

The low-rate environment creates buying opportunities for investors looking to add real estate to their portfolios, she said. “But it will be a rough ride in the near term.”

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