As we try and erase 2020 from our memories and run head-first into 2021, I’m actually quite bullish and optimistic about the housing market in a way that I haven’t felt in years past. Here are my reasons why that is, and I want you to tell me why I’m wrong (nobody likes a debate when both people agree, right?
- Canadians are saving money like they never have before.
- Rates will remain SUPER low.
- The deferral cliff is not a cliff but a slope so gentle that a 3 year old can learn how to ride a bike going down without falling off.
- Insolvencies are going DOWN. Huh?!
- New CMHC programs and maybe gasp! An easing of the stress-test
Let’s start with #1. The big one. Canadians are saving money like crazy. Deloitte Canada estimates that Canadians have saved nearly $200,000,000 this year. It got to the point where our Finance Minister went on BNN and basically pleaded with Canadians to spend this money as soon as they can. Think of these savings as a natural way of boosting the economy. When people save money, they naturally will want to spend it OR invest it. If they choose to invest it, into Real Estate, this brings me to my next point:
Interest Rates will stay very low for a while still. So when you have $200B in savings and you’ve finally caught up on your RESPs, RRSPs, renovations, or have gone out to eat at the Keg five days in a row, you may want to start buying or continue buying real estate, no? And when you look at how cheap it is to borrow money these days for an asset class that has continued to perform like bonkers over the past 20 years, I won’t be surprised if this money flows into Real Estate.
Number three and number four are linked together. Back in May, our CMHC president, Evan Siddall, predicted a 5-19% drop in house prices and said on record that the deferral cliff would loom large. He wasn’t wrong in making that assumption. Many people thought “what will happen once the deferrals stop!?”. We all held our breath. Then the banks started to report their numbers. Go figure! 83% of deferrals have gone back to normal repayment as of this quarter. 83%! And that number is rising. What’s dropping? Insolvencies. What!? Weren’t we all told that the number of people going bankrupt would go up? It’s 38% lower this October than October 2019. Huh? That’s good! That means Canadians have managed their debt levels well enough to keep their heads above water.
Final reason why I’m loving Real Estate in 2021: The new CMHC program (specifically for Toronto, Victoria and Vancouver) should help first-time buyers with an increased cap on 1. Income to debt and 2. The maximum price that CMHC will allow under this program. This means that first-time buyers can now target properties that are $722,000 or less (and not $505,000 or less, which was the previous cap). This means more first-time buyers should enter the market into condos. This means that the supposed condo glut should ease up a little bit. This means that those condo sellers can keep moving up into freehold properties. This means that I’m bullish on Condos and on the market in general. What else could we see in 2021? An easing of the stress-test. Nothing major, but instead of using the 5 year POSTED rate of 4.79% (as of today), we might see the stress-test modified to 2% HIGHER than your discounted rate. Today’s rates for example would mean the stress-test would be at 3.79% (today’s rates are around 1.79% +2%). What would that do to your buying power? A $100K borrower with 5% down today can borrow at maximum 4.8x income or $480,000. If they change the test the way to +2%, that same buyer can borrow 5.3x income or $530,000. Not bad! How likely is this? Well, just prior to the pandemic it was supposed to happen so at least it has been discussed and reviewed.
Of course I would be loathe to forget about the vaccine. This is probably the single biggest reason why I’m bullish on Real Estate however I can’t really say I know much about it. I’m not a scientist. I will for sure get vaccinated as soon as I can, and in the meantime I’m definitely following our Government protocols and guidelines. As the vaccine rolls through our elderly and healthcare workers first, and eventually into the general population, I see a glimmer of hope that life can return to normal. When that happens, I think people will re-evaluate what “home” means and continue on the path to real estate ownership.
Other reasons I’m bullish on Real Estate (this is Toronto-specific). If Amazon, Shopify and now a massive Reit (DREAM) want to invest in Toronto office space, don’t you think those companies see something that spells opportunity? For them to grow within our downtown core? If you take a walk through any ‘hood in Toronto, what else do you see a ton of? Building and renovating. People are building like there’s no tomorrow even with all of the red tape in the city to get permits. This is a great sign and one that I think will continue with these super low rates.
Now, tell me how and where I’m wrong. I’d love to know. I’m usually pretty balanced on real estate and in the past have even become a little conservative on it. I’m biased, because I’m in the market (both as a profession and as an investor/owner). That said, 2021 I think will be an incredible year of opportunity and growth. If you are on the sidelines, do your research, make sure you can afford it today and in 5 years, but jump in if you are ready. It’ll be a wild ride.