Buyer Beware! CMHC & National Bank Forecasting Could Cost You Your Home Ownership Dream

Dated: June 17 2020

Views: 1183

Headlines from the National Bank and CMHC over the past two weeks scream massive depreciation for Toronto home prices.  Massive price drops are apparently on the horizon.  
CMHC has gone a step further to "protect" home buyers by tightening their lending criteria and diminishing buyer power for Canadians looking for their first home.  According to CMHC, prices will fall 9-18% this year, a bold prediction by the largest mortgage insurer in the country.  They also predict a 75% decline in housing starts and a 29% decline in units sold.  Basically, they are stating that the three key indicators for the housing market will all be negative and this will lead us into a "historic recession". 
Not to be outdone, National Bank cites previous recessions for their gloomy forecast.  They are predicting a national decline of 9.8% (consistent with CMHC's lower end of their prediction) and they expect Toronto to lead this decline with a 13% dip.  THIRTEEN PERCENT!!  The National Bank has backed up their bold prediction with historic figures from previous recessions.  They state that in 2008, prices dropped 6.3%.  In 1981's "largest price correction to date", prices dipped 9.2% according to the National Bank.  
It's pretty easy to manipulate numbers and spin a story to justify your claim that the Toronto market will dip.  So let's take a look at actual Toronto sales numbers from 1974 to date.  Let's drill down on what previous recessions have meant for Toronto's average price point.  
In 1980, Toronto's average price point was $75,694.  In 1981, the average price was $90,203.  This was an INCREASE of 19.17%.  By all means, this was NOT healthy appreciation.  When you see appreciation at this rate, you know there will be a correction coming.  Everyone predicted a correction in 1982.  What was that correction?  1982's average price was $95,496 in Toronto.  Yes, another increase - albeit a healthy one this time - of 5.87%.  
The article does not mention the 90's, where Toronto actually had significant dips during that recession.  However, as I stated earlier, increases of approximately 20% are not healthy.  In 1986, the market went up 27.34%, in 1987 the market appreciated 36.12%, in 1988 the market jumped another 21.43% and in 1989 the market went up 19.19%.  We were due for a correction.  Over the next four years, we saw prices dip between 3.95% and 8.25%.   Even with this, the market showed (approximately) a 100% increase from 1981 to 1996.    In a 15 year period that had TWO recessions built in, the Toronto Real Estate Market showed growth of approximately 100%!  
Since 2008 was mentioned in the report, let's take a look at those numbers too.  2007 was a great year, up 6.9% over 2006.  2008 saw us hit a road bump in early summer as the sub-prime market south other the border stopped the Toronto Real Estate Market in its tracks.  And a hard stop it sure was.  We didn't rebound until late fall, as all eyes were on what was happening down in the USA.  How did we do for average price in 2008?  It was an off year, however we were still up just shy of 1% over 2007.  And remember, 2007 was a stellar year.  Not bad for recession #3.  
Since 2009, our market was on fire.  Steady, yet healthy, increases in average price continued through to 2016.  In 2016, we started to run out of supply.  The economics kicked in and with demand remaining strong, we started to see multiple offers and bidding wars on pretty much each listing.  We saw a very unhealthy increase of 17.31%, followed by 2017's torrid start that saw prices continue to escalate.  The Ontario government stepped in to throttle demand instead of fix our supply problem.  By making it harder for Canadians to purchase homes in the Toronto area, they achieved their goal to stall the market and we saw a price decline of 4.21%.  We had still not addressed the supply issue.  As consumer confidence returned with a new government and renewed dreams of Home Ownership, we have seen healthy increases through 2019 and the early part of 2020.  As Covid-19 paused our market, price remains stable over the last three months.  The strength of the market pre-covid, has 2020's Average Price up 7.22% in Toronto.  Although we expect this to level off to around the 4-5% mark for the year, it will still be a decent year for price appreciation.  The decline is sales volume is a given since we have been locked down for a full quarter.  The main reason that prices continue to increase are supply related.  Demand remains strong in the Greater Toronto Area.  With fewer home starts (CMHC predicts 75% less home starts), the supply issue will become magnified.  Each home that is on the market will receive more attention from they buyers that are out there.  This applies upward pressure on price.  It's simple economics.  If demand continues to outweigh supply, there will be upwards pressure on price.  
The National Bank needs to take a deeper look at the Toronto Real Estate Market before making bold predictions of a double digit price drop in average price.  Looking back over 45 years, the Toronto market has not shown a double digit price drop.  As for CMHC?  Well, their predictions of a 9-18% price drop followed by their policy changes to make it harder for Canadians to choose home ownership make me question their intentions.  It seems they used their fear mongering report of the price decline to pave the way to justify their new policies.  
Both of the above mentioned reports will wreak havoc on home buyers.  Those that decide they want to hold off on purchasing a home could be priced out of the market.  If someone decides they will wait for a price drop that isn't coming, and prices increase 5% this year and 5% next year, that's a huge increase over current pricing.  This could result in people being forced to rent forever.  That is of course the worst case scenario.  The best case scenario for the buyers that hold off is that their buying power will be reduced significantly.  If the market increases by 5% this year, that's 5% that you just lost in buying power, and the home you are looking at right now is $650,000, you're throwing away $66,625.  
The important thing to note is that for accurate market information, you need to ask your Realtor.  Do not rely on irresponsible reports and forecasts from economists that aren't active in the market.  Falling for irresponsible predictions without taking actual statistics and market conditions into account will cost you money.  This isn't a few thousand dollars either.  If they re predicting a 9-18% drop, let's just go with 13% from the National Bank numbers, on a $650,000 home they are saying that the value will drop to $565,500.   In reality, the price will go up by the end of 2021 to $716,625.  That's a difference of $151,625 between the expectation they are setting and the realistic value of what the home will be worth by the end of 2021.  This is why reports like this will hurt buyers more than they will help them.  Irresponsible forecasting from one of the largest banks and the largest mortgage insurer.  Buyer Beware!

Blog author image

Asif Khan

With a clear vision to provide R.E. Solutions. Asif sets the standard for today's Real Estate Professional. Asif's Mission is to exceed your expectations. As an ABR and CLHMS with vast experience in C....

Latest Blog Posts

Federal Budget 2021 - Is Affordable Housing On The Horizon?

So much speculation around changes to the capital gains tax exemption, changes to lending policies and much more prior to the Federal Budget being released.  The headlines did not

Read More

Is This The Year For Toronto's Real Estate Bubble To Burst?

We’ve all heard the Toronto Real Estate numbers for March, and to call this a “hot market” would certainly be an understatement. 15,652 transactions for the month of March 2021.

Read More

A Lion In Lamb's Clothing

With everything that has happened in 2020, you'd think housing markets would be behaving like little lambs. Flying along under the radar, the markets have been lions! Especially the Toronto Market.

Read More

Buyer Beware! CMHC & National Bank Forecasting Could Cost You Your Home Ownership Dream

Headlines from the National Bank and CMHC over the past two weeks scream massive depreciation for Toronto home prices.  Massive price drops are apparently on the horizon.  CMHC has gone a

Read More