In notes prepared for the Standing Committee on Finance yesterday, CMHC CEO Evan Siddall said the housing corporation is now forecasting between a 9 and 18% drop in average house prices over the next 12 months.
According to Siddall, through the COVID-introduced relaunch of the Insured Mortgage Purchase Program, a coordinated effort with both the Bank of Canada and the Department of Finance, CMHC stands ready to purchase up to $150 billion of insured mortgages.
This is in combination with the agency's efforts to work alongside private mortgage insurers to provide a temporary deferral of mortgage payments for up to six months.
Currently, CMHC estimates that 12% of mortgage holders have chosen to defer payments so far, but they believe that number could rise as high as 20% by September. In step with several provincial governments, including Ontario, CMHC is supporting a full-stop to evictions during the COVID crisis.
But, as Siddall points out, all of this is being done through borrowing – leading to historic levels of household debt.
Even before the pandemic, Canadians were among world leaders in household debt, with "the ratio of gross debt to GDP for Canada... at 99 per cent." According to CMHC, the Bank for International Settlements has shown that "national debt intensifies the drag on GDP growth" once a threshold of 80% is crossed. What's more, Siddall added that CMHC expects that ratio to grow to more than 200% through 2021.
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"The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s longer-term financial stability. A team is at work within CMHC to help manage a growing debt “deferral cliff” that looms in the fall, when some unemployed people will need to start paying their mortgages again. As much as one fifth of all mortgages could be in arrears if our economy has not recovered sufficiently."
Given the unprecedented levels of unemployment currently taking place due to the COVID outbreak and subsequent measures put in place as well as the decline in housing prices and higher mortgage debt, CMHC is even considering restraining their underwriting policies to limit excessive borrowing, while also taking "urgent action to accelerate the supply of rental housing."
Adds Siddall, "Our support for homeownership cannot be unlimited. Homeownership is like blood pressure: you can have too much of it. Housing demand is far easier to stimulate than supply and the result, as we’ve seen, is Economics 101: ever-increasing prices. So if housing affordability is our aim, as surely it must be, then there must be a limit to the demand we help to create, especially when supply isn’t keeping up."
According to CREA, the 199,000 units sold (seasonally-adjusted and annualized) in Canada in April were the smallest monthly total the country has seen since September 1984. However, the generational low has yet to create unbalance in the market, as supply and demand fell in near-perfect tandem, keeping the sales-to-new listings ratio little changed at 0.62 (compared to 0.64 in March and 0.65 in February).
So far, housing prices across the country have yet to take a substantial hit, with April seeing just a 1.3% year-over-year decline. But, if Siddall and CMHC are right, and in a few short months one in five mortgages are in arrears, that "deferral cliff" could quickly change everything.
