Canada’s housing markets broke records in 2020, even as a global pandemic raged, but prices could be poised to fall next year.
Fitch Ratings says demand has been unsustainable and expects home prices to fall by 3 per cent to 5 per cent in 2021 after a 7 per cent increase in 2020, in a new report.
“We attribute the expected decline to lower demand caused by elevated levels of unemployment and increasing affordability issues,” said Susan Hosterman , a senior director at Fitch Ratings, in the report.
Additionally, declining rents, a significant drop in immigration and the B20 mortgage affordability stress test will put further pressure on home prices.”
The agency also says affordability will be negatively affected when household debt rebounds after a nearly 20 percentage point decline because of government support and payment holidays. It also says fewer buyers will be able to qualify for the B20 stress test.
Rents have dropped 10-15 per cent in major cities, so Fitch Ratings says smaller monthly rent payments will make home ownership less desirable.
Immigration was down 41 per cent year over year, and despite the federal government’s lofty goals, Fitch Ratings expects it to remain low and weigh on demand.
A wind-down of the mortgage deferral program is seen as another headwind.
“As many as 16 per cent of all mortgage borrowers are on a payment holiday according to data from CMHC.” said Hosterman.
“With the six-month payment holidays coming to an end and borrowers having to resume payments in 2021, Fitch expects delinquencies to increase to 0.35 per cent to 0.50 per cent due to elevated unemployment putting further pressure on the borrower.”
With that said, while Fitch Ratings expects delinquencies to rise, it doesn’t expect a repeat of the high levels, distressed sales, and foreclosures seen in the U.S. during the financial crisis.
“This is due to servicers having strong relationships with their borrowers and their close monitoring of their borrowers’ financial situations after putting them on payment plans,” said Hosterman
“Historically, the servicers have been pro-active in offering modifications or working with borrowers to make payments affordable. We forecast delinquencies to return to the pre-pandemic levels in 2022 as the economy improves.”
Fitch Ratings expects prices to rebound to 2020 levels by 2022, as the economy returns to its pre-pandemic form.
It’s more bullish on U.S. real estate — forecasting a rise of between 1 per cent to 3 per cent. It expects low supply, high demand, and low mortgage rates to drive prices upward.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.