COVID-19 mortgage outlook

2020 Mortgage Forecasts: Defaults to Jump, Originations to Tumble, Sales to “Suffer”

There’s no doubt that Canada’s mortgage and real estate industries will suffer in the short term due to the impacts of the coronavirus pandemic. But how long will the pain last and how far out might the recovery be?

Those are questions being asked by many in the industry, and some have put forth their best guesses. Here’s a look at the latest mortgage-related forecasts for the remainder of 2020 and into 2021…

Mortgage Arrears to Rise in 2021?

So long as mortgage deferrals and government income assistance remain in place, no major increases are expected in Canadian mortgage arrears in the short term.

Once mortgage deferrals expire and fiscal stimulus supporting households starts to run out, the arrears rate could jump as much as 50%, peaking by Q1 2021, according to some forecasts.

missed mortgage payments“Assuming government support tapers off in 2021, and based on the historical relationship between employment and mortgage arrears, we see potential for the mortgage arrears rate to average ~35 bps in 2021 vs. 24 bps currently (as of October 2019),” according to TD.

RBC Capital Markets reached the same conclusion, saying, “…It is unlikely that we will see a material increase in delinquency rates until mortgage deferrals expire.”

By comparison, mortgage arrears reached a peak of 0.45% during the financial crisis of 2007-08still well below the delinquency rate of 11%+ seen in the U.S. during the financial crisis, however.

But some say signs of strain are already starting to appear in certain credit segments.

“There’s early tentative credit card data coming in from credit card trust portfolios. And as expected, the arrears rates are starting to rise [and] the loss rates are starting to move up,” Ben Rabidoux, president at North Cove Advisors, told yahoo! Finance.

Mortgage Originations to Slump

The mortgage industry as a whole is expected to face some strong headwinds “over the near-term as employment trends weaken, credit loss provisioning moves higher, and housing / mortgage activity pulls back materially,” TD noted in a report.

New mortgage originations could fall by as much as 35-40% in the second and third quarters of 2020, TD said, with a recovery taking hold by the fall.

On the positive side, “mortgage spreads have widened out and deposit costs have come down, suggesting funding conditions and liquidity has improved for the mortgage lenders,” TD noted.

Home Sales, Prices to Suffer Short Term Pain

TD bank home price forecast 2020

Canadian real estate is currently in a “deep freeze,” with both buyers and sellers having moved to the sidelines to wait out the uncertainty of the ongoing pandemic, according to TD Economics.

“In light of the pandemic, we envision Canadian home sales remaining below their pre-virus level for the remainder of the year. Sales are poised to plunge at a historic pace in April, while gradually recovering their lost steps in subsequent months as buyers remain cautious,” notes economist Rishi Sondhi, adding that this forecast assumes a gradual re-opening of economies throughout the month of May.

“Under these assumptions, Canadian home prices suffer an outsized decline in the second quarter. After which, national average home price growth should proceed at a positive, but subdued pace for the remainder of the year.”

This forecast is similar to others we’ve reported on previously, which anticipate modest price declines in the short term before returning once again to positive growth.

Capital Economics economist Stephen Brown forecasts a 5% decline in prices in the coming months, while RBC Economics’ Robert Hogue expects Canada’s composite benchmark prices to fall briefly over the second half of 2020 by an average of 2.9% year-over-year.

Moody’s, on the other hand, is forecasting a 10% decline in home prices from their peak.

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