Canada's Real Estate Market will Recover in the Second Half of 2020
When the first measures were taken to combat COVID-19, the Central Bank of Canada and leading financial institutions did not wait to get an answer to the question of whether the massive economic crisis would lead to the collapse of the residential real estate market. They saw the first signs of this and took up the life support of this sector.
In just the past few weeks, the federal government and Bank of Canada have announced that they will inject at least $ 150 billion, and possibly much more, into Canadian banks and mortgage lenders to provide them with cash to continue lending.
According to the Bank of Canada, today there are signs that Canada's mortgage lenders are about to freeze existing loans, as these cash collection channels no longer worked. Credit freezing in itself would greatly exacerbate the current economic crisis. Without the possibility of mortgage lending, home sales in Canada would collapse, and prices would fall freely.
Canada now, more than ever, is dependent on the real estate sector. Such consequences for its economic growth would be very painful. And Canada, in order to save the residential real estate market, is flooding banks with cash and is also nationalizing mortgages. There is a good chance that the government will own your mortgage in the coming years, but you may not even know about it.
Mortgage lenders often sell their loans to outside investors, that is, your mortgage to raise cash to provide even more mortgages. This process is invisible to mortgage payers, because usually the lender who first issued the mortgage continues to manage it. Most people never realize that the bank they make payments to does not own their mortgage.
Today in Canada, there are about 10 percent of $ 1.633 trillion of outstanding mortgage debt. The Bank of Canada will buy mortgages at a rate of $ 500 million per week or more than $ 2 billion per month, apparently as long as the Bank considers it necessary. Thus, the total amount of mortgages withdrawn from the accounts of Canadian lenders, as well as cash injections into banks, may ultimately exceed $ 150 billion.
If this works, banks will now have money to continue to issue mortgages. But this is not all: it makes the entire banking system more stable, giving lenders a huge unexpected influx of cash that they can use to compensate for the inevitable losses that they will see now, as people and businesses stop paying their debts.
This $ 150 billion cash infusion is probably one of the main reasons why Canadian banks seemingly so selflessly agreed to defer mortgage payments to payers who were affected by COVID-19. All six largest banks in the country have introduced mortgage deferral programs, and every tenth mortgage loan is now in the process of being deferred.
It is too early to say how much this will affect the situation in the country. But, according to preliminary data on the housing market for March, many markets were overheated, and the situation with coronavirus ensured a drop in mortgage rates. Further, sales fell to such an extent that Toronto is now the “buyer's market”.
The Royal Bank of Canada, in a recent report, predicts that the housing market will hit bottom in June with a 70 percent drop in annual sales before recovering in the second half of 2020.
But if you look at the speed and intensity with which politicians reacted to a potential threat to Canada’s real estate market, one thing is clear: the people responsible for this will not allow the market to crash.
Published: June 3, 2020