Op-Ed: Why all the fear mongering by the CMHC over Canadian home prices?

The strength of the Canadian real estate market has proven itself time and again during the pandemic. While we’re not out of the woods yet, we are expecting continued growth for the duration of 2020, with an active market for the foreseeable future and balanced conditions at the national level into 2021. This is great news for Canadians.

So why all the fear mongering by the CMHC?

The Canada Mortgage and Housing Corporation’s Chief Economist Bob Dugan told reporters at a press conference recently that the agency stands by its previous forecast in May that warned of a decline in Canadian house prices between nine and 18%.

“I’m not convinced that we have a sustainable basis for housing demand in the economic disturbance that’s going on related to COVID-19,” Dugan said. “That’s why I say I stand by the forecasts.”

We expressed our concerns over CMHC’s predictions in the spring, and Dugan’s latest statement continues to raise eyebrows – ours, and other industry insiders as well, as the Canadian housing market stays on its upward course.

While I can appreciate some of the reasoning that went into CMHC’s prediction, especially in the spring when so much was still unknown, the market data doesn’t support such a steep price decline, especially with the two largest real estate markets of Toronto and Vancouver continuing their upward momentum. The Prairies are facing different circumstances and challenges due to the resources sector, but Ontario and BC are expected to offset slower activity in Saskatchewan and Alberta.

Home prices so far resistant to recession

Nobody could have predicted the success of the Canadian real estate market in the wake of COVID-19. The height of the pandemic, March and April 2020, saw dramatic declines in activity, but transactions quickly resumed across the country as real estate professionals and consumers alike adapted to social distancing measures and embraced technology to continue transacting, despite disruptions to the economy and every facet of daily life.

Last month, RE/MAX Canada revised our forecast for growth in the national average house price in 2020, increasing it to 4.6 percent from our original expectation of 3.6 percent at the end of last year.

In terms of declining prices, “the impact was on rent as opposed to home ownership,” said Benjamin Tal, Chief Economist at CIBC World Markets. His optimism in the Canadian housing market was due to continued low interest rates and strong pent-up demand. “Eighty per cent of jobs lost were in the service sector. Many of them were low-income and many of them were renters. So, the impact was on rent as opposed to home ownership,” he noted.

Economists believe in Canada’s housing market

RBC Economics recently reported that a large-scale decline was unlikely. “The pandemic completely disrupted normal seasonal patterns by shifting activity from the spring to summer,” wrote RBC chief economist Robert Hogue. “With pent-up demand now largely exhausted, we see activity cooling later this fall. This should let some of the steam out of prices though not to the point of causing outright declines on a large scale.”

TD’s Beata Caranci also commented on Canada’s “swoosh” economic recovery and the housing market. The level of unemployment, she says, suggests the housing market should not be as active as it is. However, when you look at income levels, it all makes sense. Incomes today aren’t behaving like we’re in a recession, and incomes are being supported at the same or at higher levels than in previous recessions. The complete disconnect between the employment rate and income levels is adding fuel to the housing market.

So, if the real estate industry disagrees and economists disagree, just where is the CMHC getting its insight to support such a steep decrease in home values?

Recently the Ontario Real Estate Association surveyed Ontarians, finding that a strong majority think housing is an important (60%) or somewhat important (32%) contributor to the provincial economic recovery. They are now pushing governments to help stimulate the market with incentives like a land transfer tax holiday to help get more homes on the market and address some of the supply issues the province in currently facing.

I do think we may see a “hangover” from the busy market we’re experiencing right now, but as we head into 2021, I think a prediction of more balanced conditions across Canadian housing markets is warranted. But an 18 percent decline in prices is highly unlikely.

Christopher Alexander is executive vice president and regional director of RE/MAX INTEGRA’s Ontario-Atlantic Region.