Canada

Canadian Real Estate Prices To Make Double Digit Drop, Another Risk Agency Tells Institutional Investors

Another global risk agency is warning wealthy investors that Canadian real estate prices will drop. DBRS, the ratings division of Morningstar, released its forecast for mortgage and price performance in Canada. The firm warns investors to expect climbing arrears, and double digit real estate price drops across Canada.

Forecasting Scenarios

Institutional research provides a range of forecasting scenarios that depend on fundamentals. DBRS gives a “moderate” and “adverse” scenario, mostly revolving around unemployment when it comes to real estate. The moderate scenario assumes unemployment hits 10% in 2020, a point we just passed today. The adverse scenario sees unemployment at 14% by year end. For context, parliament is currently forecasting an unemployment of 12.5% this year. The government expects things to be somewhere between the two indicators.

Canadian Mortgage Arrears To 1980s Recession Levels

Canadian mortgages in arrears are set to spike to new highs. In the moderate scenario, mortgages in arrears would rise to 0.65% – nearly 3x where they are today. In the adverse scenario, this rate would rise to 1% across Canada. In the adverse scenario, arrears would be at a level not felt since the 1980s. For the unfamiliar, this would match the worst housing crash in Canadian history. Bank deferrals are expected to help with an orderly sell off, and more steep declines.

Canadian Rate of Mortgages In Arrears: Moderate

The rate of mortgages in arrears across Canada, in the DBRS modest scenario.

*forecast

Source: CBA, DBRS, Better Dwelling.

Ontario’s Mortgage Arrears Rate Forecasted To Rise Up To 800%

Ontario’s high flying market is expected to see one of the biggest surges across Canada. The nearly record low 0.09% arrears rate is expected to more than quadruple to 0.45% in the moderate scenario. In an adverse scenario, Ontario would see the rate rise ~800% to 0.79%. Remember, velocity and rapid shifts in expectations are more important than the size. An issue we previously discussed with money laundering, and the impact to Vancouver real estate prices.

Canadian Rate of Mortgages In Arrears: Adverse

The rate of mortgages in arrears across Canada, in the DBRS adverse scenario.

*forecast

Source: CBA, DBRS, Better Dwelling.

B.C. Mortgage Arrears Expeted To Increase Up To 500%

British Columbia doesn’t see quite that increase, but it is expected to rise very rapidly. The 0.14% mortgage in arrears rate is expected to more than triple to 0.51% in the moderate scenario. In the adverse scenario, this rate is expected to more than 5x to 0.82%. This would be a drastic change for one of Canada’s most expensive provinces.

Quebec’s Mortgage Arrears Rise Above 1%

Quebec’s rate of mortgages in arrears is already higher than both provinces, so it doesn’t climb as much. The 0.27% rate in the province is expected to rise to 0.67% in a moderate scenario. In the adverse scenario, the arrears rate is expected to climb to 1.01%. More moderate prices in the province help to prevent the growth rate, but it’s still very high for the province.

Canadian Real Estate Is 20% Overvalued

Canadian real estate is overvalued – we know, not a shock for non-Canadians. The firm estimates prices across the country are 20% over their fair value. In a modest scenario, they expect a 10% pull back across the country. In the adverse scenario, they expect prices to fall 15% from 2019 values. Even in the adverse scenario, prices aren’t expected to reach fundamental levels. This is likely due to moral hazard created by the government, and repeated attempts to prevent corrections at much lower levels of fundamental detachment.

Canadian Real Estate Prices Moderate Scenario

The estimated index price for Canadian real estate, in the DBRS moderate scenario.

Source: DBRS, CREA, Better Dwelling.

Toronto Real Estate Prices Are 26% Overvalued

Toronto is the most overvalued region in the forecast, and is expected to see a bigger correction. The firm believes Toronto is 26% overvalued, and will see prices decline 14% in a modest scenario. In an adverse scenario, prices are expected to fall 18% from their 2019 values. The gap between prices and fundamentals will still be the largest in Canada.

Canadian Real Estate Prices Adverse Scenario

The estimated index price for Canadian real estate, in the DBRS adverse scenario.

Source: DBRS, CREA, Better Dwelling.

Vancouver Real Estate Prices Are 18% Overvalued

This may come as a surprise to people in Vancouver, but prices are less overvalued than in Toronto. The firm believes prices are 18% overvalued, and a modest scenario would see prices fall 10% from their 2019 values. In the adverse scenario, prices are expected to fall 15% from their 2019 values. Worth noting prices in 2019 are down 10% from 2018, so this would be a continued slide from peak for the City.

Montreal Real Estate Prices Are 11% Overvalued

Montreal real estate didn’t see prices rise until recently, so overvaluation isn’t much. The region is estimated to be 11% overvalued, and will drop 6% in a modest scenario. In an adverse scenario, prices are expected to drop 10%. This would wipe out almost any premium to fundamentals in the region.

There’s been a disconnect between consumer and institutional risk forecasts. Consumer forecasts are published by parties with exposure to losses itself (i.e. banks, real estate brokerages, etc.). In fact, some have actually told consumers they expect mild price increases this year. Risk forecasts, for institutions and wealthy investors, warn to lower real estate exposure. As gloomy as the DBRS double-digit price declines look, Moody’s warned institutions Canadian real estate prices could see a much bigger drop.

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38 Comments

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  • Trader Jim 3 months ago

    Remember when you said it was 26% overpriced at the CMHC conference, and everyone gasped… before saying it was impossible?

    Guess what? 2019 Toronto real estate hit the same level as 2019, and *drumroll* one of the worlds biggest investors data services agrees. Congrats.

    • Mortgage Guy 3 months ago

      CREA said they won’t release a forecast this year. Enough said.

      Never buy more than you can afford. Never be sold that a single asset will be your path to riches.

  • Kathleen Thomson 3 months ago

    Jobless rate is at 13% as of this morning, and participation is grinding lower. We’re looking at a 10 year recovery at least.

    Realtors: IF YOU DON’T SELL, PRICES CAN’T FALL.

    I think this might be a case of last one out is a rotten egg. Not looking to sell my place, but I also bought in 2013 not thinking my real estate would be my only path to prosperity.

  • LT 3 months ago

    Vancouver’s prices are also composite, so the skew helps to offset the fact that detached homes have fallen much more, and will fall even further from there. This is about 40% or so, with employment and luxury shopping vanishing fast.

    Not to mention China is creating so much opportunity, the reason to immigrate to Canada is going to fall fast over the next few years.

  • ADH 3 months ago

    The sources citing a 20-26% correction are protecting their own assets with how outrageously understated that is. 30 min from Atlanta and Dallas a 2500 square foot detached new builds go for $3-400k and they make money. Winnepeg – detached 17-1800 square feet is $445k and Guelph same thing is $760k. Canadians need to wake up. Using previous articles here, GDP per capita bests Toronto in those two cites, never mind the fact nobody in the world has hear of Guelph or Winnipeg. Boston real estate is on par to ours, but their GDP per capita is nearly double 416. Pop density is greater too.

  • Rob 3 months ago

    Where the bulls at 😂
    Wait, what 👂

  • fred 3 months ago

    I think the price going up at least by %20 for year 2020 .
    Government ( The bank of Canada) will give $100,000 free money for down payment for who ever to commit to buy a home.

    • Yvette 3 months ago

      Why not 50% and the government just buys the whole house?

    • Sideliner 3 months ago

      Don’t worry. It will not work. If you have no job you can not pay a mortgage. Even if the government gives you the whole house for free, how do you pay property tax etc.?

      • Whiskey Foxtrot 3 months ago

        and when transactions fall, you have cities like Vancouver that are already near bankruptcy from pre-COVID-19 volumes not high enough. They’ll have to raise property taxes, or income taxes.

        My marginal tax rate is already above 50%. Move it one notch higher, and I’m moving my company (and all of its employment) elsewhere.

      • fred 3 months ago

        You use mortgage defferal.

        • Neo 3 months ago

          It’s a deferral dude not a debt jubilee. You still have to pay it later….with interest…and if you don’t have a job by that point you are in serious trouble.

  • Rob 3 months ago

    I like your optimism
    Makes as much sense as the stock market

  • fred 3 months ago

    Yvette

    Yes , that is more possible as stocks (Nasdaq) is up more than %35 from its low in March.

    • Neo 3 months ago

      Don’t compare the two things. A $1 million detached house in Milton isn’t the same as MAGA……..Google, Amazon, Microsoft, Apple driving the Nasdaq and overall market right now.

    • Cringe Analysis 3 months ago

      Jesus it’s embarrassing to see regular people try to do market analysis.

  • fred 3 months ago

    Do not underestimate the free money and boost from government.

  • Rob 3 months ago

    Don’t fight the Fed has never been more true
    Fundamentals be damned

  • straw walker 3 months ago

    I lived in Calgary and saw several downturns..
    1) first is auto dealers have returned auto leases unpaid..People just walk in and throw the keys at the dealer..
    Auto dealers in Calgary had a $39 buck transfer cost on any vehicle and assume lease.
    2) Banks had auto, boat truck seizure lots full of reposed vehicles.. pick any you get a deal..
    3) Every week hundred of second mortgage foreclosures in the paper..pages of them
    Second mortgage is removed and you assume the 1st mortgage and what every has been pd. on it.
    4) Quick claims are instituted… owner in arrears signs a transfer of property over to bank.. no lawsuits.
    It’s coming to a bank near you

  • GTArenter 3 months ago

    So here is what I’ve been thinking. For those business who’s employees can work from home they will continue to do so even after this is all over and start to reduce their overhead by divesting themselves of huge office buildings instead limiting themselves to only a floor or two for those few things that must happen face to face.

    This will untether employees from having to live close to where they work, which means that they may no longer even try to buy a home in an overvalued city like Toronto and move to where things are more affordable.

    Are CERA, realtors or even the government thinking about how if the nature of work changes the nature of the housing market will change with it?

    But maybe I’m wrong maybe everything will go right back to normal after this.

  • C.D,R. 3 months ago

    The majority of the newer dt Toronto condos are ghost hotels with at least 25% STR as opposed to long-term residential units, whether rental or end user.
    With whole apartment unit Airbnb’s being dead for the foreseeable future due to covid-19 and city by-laws enforcement, there are 15,000 units in the dt core that could be added to the supply that will definitely help ease some of the very low LTR vacancy rate.

    Depending on when they purchased the units, I think post-2014 Airbnb buyer/owners will be cash flow negative if they have to go semi-long term, LT leases or even executive rentals as I don’t think they’ll get the usual price premium for furnished units as the competition will be intense from dedicated hosts who have contractual corporate clients.

    So there’s the big possibility that those 15,000 units will be split between LTR units and hitting the resale market for sale.
    There’s already 15,000 unsold pre-construction units in 2020, with the possibility of up to another 15,000 additional units.

    Central Toronto R/E is selling for $1,200-1,500 PSF, which doesn’t financially makes sense when personal income, rental income metrics don’t make it feasible.

    In all likelihood, the above along with higher unemployment will also reverse the price appreciation and rents that rose about 10+% a year from 2015 to 2019 back to $500 PSF and $30-36 PSF/annum rents.

  • fred 3 months ago

    Real estate is biggest industry in Canada without it no economy in Canada .
    https://www.statista.com/statistics/594293/gross-domestic-product-of-canada-by-industry-monthly/

    With average income $80000 for a couple , how do you think the price got so high in toronto in a first place.
    With help of bank of Canada insuring the mortgage through cmhc , the big banks give mortgage like a candy without really checking the income , If the mortgage fail they get their money from cmhc that is how they pump the price so high.
    People who bought house for a million dollars how come they do not have saving of 20000 to by pass a couple of months .

  • robert christian 3 months ago

    All I have ever asked for is for the writer to consider what territories he/she is referring to. Here in Ottawa, there won’t be double-digit price increases. Mostly because we sell 2 bedroom condos for 400K, not 1.5M.

    Pretty simple though and I do recognize that Toronto and Vancouver do have lots of readers. They just don’t make up the whole of Canada.

    • robert christian 3 months ago

      Correction, should have read “decreases”.

  • Kevin N 3 months ago

    The government has spent the last 20 yrs continually propping up the real estate industry. They refuse to let it correct. Not only have they propped up homeowners investments, they’ve propped up flippers, foreign investors, developers and domestic investors who have all made out like bandits, driving the prices into the stratosphere.

    So now we have a generation of people who have put everything into 1 investment. What a disaster. In Toronto, 2003, homes sold for 300-400. Now? 1.5-2 mil. Let the market correct already!! 25-30%.

    • brett 3 months ago

      couldn’t’ agree more! I’m so disappointed in our Canadian government not pursuing a more diversified and productive economy…Rather than work toward fair markets and price discovery, our elected officials have taken the easy-sleazy approach of crony capitalism and abandoned once cherished values and fed moral hazard. We’re rewarding exactly the wrong people with these priorities…

  • brendon 3 months ago

    I dont see anything correcting? prices are holding up, for now and inventory super low in toronto! I’ll jump on the correction train when i see inventory rise.

    • Darren Stone 3 months ago

      Too soon. Right now the market is frozen. No buyers or sellers. Prices will collapse when owners have to sell the house. But no buyers. This lack of liquidity will cause insolvency, foreclosure and price discovery…which wil be whatever a buyer will pay the seller.

  • michael 3 months ago

    Sure, a 20% correction, which takes us to what 2018?

    Does anyone remember which year was it that the CMHC removed the cap on an insurable mortgage? I seem to recall it had been at $200k.

  • DB 3 months ago

    Too late now and too little.

  • Rob 3 months ago

    If loose monetary policy created these market distortions (Real estate/Stock market) how does further government backstops improve the future economy ? When and how will the market (credit) cycle be deleveraged ? 🤔

  • Reality check 3 months ago

    Lets face it, Canada have no lack of land, Horrible weather, high taxation, low income. Your crappy house is not worth what want it to worth. Time for the bubble the burst. I hope anyone with more than 2 houses go bankrupt this year. They deserve to be wiped out.

  • DB 3 months ago

    Reality Check…You sound really pi$sDoof..but I agree with what you just said..too many gamblers here betting with high stakes they can’t afford to lose.

  • Herry 3 months ago

    Canada = wall to wall corruption

  • Bob 3 months ago

    Why not just defer the mortgage principal forever and just pay interest. You’re never going to get the principal back being a bank anyway. The sky is the limit 🙂 1, 2, 10, 50 million we could all be rich.

    The above was tongue in cheek.

    • Darren Stone 3 months ago

      That’s what they do in the UK. Even before COVID.
      Insane.

  • Michael Davidson 3 months ago

    Canadian real estate prices in major cities have been driven in part due to foreign buyers and investors. These investors have driven prices out of reach for most Canadians (while the politicians have done nothing).

    Meanwhile a Canadian can’t buy real estate in China, while a wealthy Chinese investor for example can buy 5+ detached houses in Canada. Hopefully with the slowdown in the China economy these properties are put up for sale by these investors for Canadian families to buy.

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