CMHC to revise the forecast of Canadian real estate prices down to 15% by the middle of 2023
The Canada Mortgage and Housing Corp. will release revised expectations for home price declines, which will be greater than the housing authority expected last summer, chief executive Romy Bowers said at a conference Thursday.
CMHC said in a new report that that national housing prices could slide 5% by the middle of next year but is revising its projections to build in a potential 10% to 15% decline in home prices.
In July, a CMHC report said a surge in interest rates could drag national home values down by five per cent by the middle of 2023. While a formal revision won’t be released until October, Bowers said it is expected to be in the range of 10 to 15%.
She said falling housing prices should make homes — which rose at unsustainable levels in the first year or so of the COVID-19 pandemic — more affordable. However, higher interest rates will offset the renewed affordability, she added during a discussion Thursday afternoon at the Bloomberg Canadian Finance Conference.
Bowers said “correcting the supply-demand imbalance” by building more homes including rental properties at all price points is the best way to remedy Canada housing affordability issues.
In May, CMHC released a comprehensive report that showed new housing starts have struggled to keep up with population growth in some of Canada’s large cities, especially Toronto, making affordability a “significant” challenge.
The following month, the housing authority said projected construction of new homes by 2030 would not be enough to solve Canada’s supply and affordability issues, concluding that an additional 3.5 million units would be required on top of those already in the works.
The CMHC report in June projected that housing stock would increase by 2.3 million units by 2030, reaching close to 19 million housing units, based on rates of new construction at the time. However, that “would need to climb to over 22 million… to achieve affordability for everyone living in Canada,” the report said.
“The number is huge,” Bowers said Thursday, adding that the size and complexity of the affordability issue should not be an impediment to addressing it.
“There’s no doubt that doubling our housing starts is very difficult, but that doesn’t make it any less desirable.”
She said CMHC is working to offset pullbacks in the development and construction pipeline resulting from economic factors such as rising interest rates and inflation, noting that some of the projects the housing authority was supporting “are no longer viable.”
But Bowers said she is not concerned that fast-rising interest rates and falling home prices will cause distress in the housing market, despite the pain to homeowners’ pocketbooks, because employment levels are not showing signs of strain.
“What causes losses for mortgage lenders is increases in unemployment,” she said. “To date, the employment picture in Canada has been very strong, so despite the interest rate increases we don’t see signs of distress in our mortgage book.”
She acknowledged that high household debt is “a vulnerability” in Canada’s housing market, one that would be aggravated by interest rate increases, but she said a mortgage stress test that requires home buyers and those renewing a mortgage to have the financial means to handle increased monthly costs “a very good policy tool in providing resiliency to the system.”
The Toronto Regional Real Estate Board is among those who have called for more flexibility in the stress test, particularly for those trying to renew a mortgage who must re-qualify at the current rate plus two percentage points.
She noted that what happens to the stress test is not up to CHMC, however, because such decisions are made by the Office of the Superintendent of Financial Institutions, which has so far rejected the calls for more flexibility, and the Department of Finance.
Since CMHC’s last forecast in July of this year, Canada’s central bank has continued to raise interest rates to lower inflation, shocking markets with a full percentage point hike in July followed by a 75-basis point increase earlier in September.
The interest rate increases have been reflected in variable-rate mortgages that are tied to the prime lending rates of private sector banks.
Variable rate mortgages offered by Royal Bank of Canada (RY), which had been at less than 2% in February are now more than 5% and could even higher if the Bank of Canada continues raising rates as is widely expected.
The sharp increase in mortgage rates has led to prices across Canada falling for six consecutive months.
Royal Bank has calculated that total home ownership costs, including mortgage payments, now account for 60% of a typical household’s income, higher than the previous record of 57%.
Part of the article was reported by Financial Post.