One of Canada’s largest banks sees turbulence for real estate markets, but doesn’t expect it this season. A CIBC research note released earlier this month sees real estate markets temporarily frozen. Once the economy begins movement again, and mortgage deferrals expire, they see things starting to change. Once this happens, the bank is forecasting lower prices, especially for condo apartments. Markets should expect to see a shift in sentiment evolve over the next year.
No V-Shaped Recovery For Canadian Employment
No surprise, and an issue that’s been cited in most forecasts – employment is going to have the biggest impact. The bank notes the unemployment rate went from 5.5% pre-crisis, to 13% at writing – and will likely inch higher. They echoed the belief most job losses will be temporary, and the market will see the rate drop to 8% next year. A 200 bps increase is all that’s needed for unemployment to become recessionary. For this reason, the bank is forecasting a recessionary environment post-pandemic. This is expected to impact both demand for housing, as well as the ability to cover home payments.
Canadian Unemployment Rate
The Canadian rate of unemployment in February, and CIBC’s forecasted peak and 2021 average. A 200 bps increase to unemployment is considered a recessionary environment.
Source: CIBC, Better Dwelling.
Canadian Real Estate Demand Will Slow, And Supply Will Rise
The bank is forecasting demand will slide, and supply will rise over the next few months. They expect “large swings,” resulting from various factors. High unemployment levels and reduced investment are expected to be the primary drags on demand. As for the increase in supply, it’s a combination of issues.
The bank expects new construction and forced sales to contribute to supply. A record number of completions were expected this year, above last year’s 190,000 units – including 29,000 high-rise condos in Greater Toronto. Due to reduced construction during the pandemic, most are expected to be delayed until next year. Forces sales will also start to become a thing next year, as mortgage deferrals expire. It’s probably safe to assume not all forced sales will be the result of defaults. Graceful exits from negative cap investment units, with bills too high, are also a thing.
Canadian Mortgages In Arrears
The historic arrears rate for mortgages at large CBA member banks, and CIBC’s forecasted rise.
Source: CIBC, Better Dwelling.
Canadian Real Estate Problems Will Be Seen In 12 To 18 Months
Due to all of these delay factors, the bank sees issues materializing “in the coming 12-18 months.” Reduced activity and incomes are expected to drop prices 5 to 10 percent on average. They further added, “high cost units in the high-rise segment of the market seeing the most notable price declines.”
CIBC’s housing timeline is similar to most recent institutional forecasts. The 12-months until impact is a little longer out than the CMHC’s bottom in 12-months call. In terms of prices, this is one of the more bearish forecasts for Canadian real estate – especially for a bank. It’s also the only bank to connect employment and housing, as well as call out high flying condo apartments as a vulnerable segment.
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