Role of the Government in Canadian Real Estate in 2020
COVID-19 is a pandemic of significant proportions, affecting all regions of the world and leading to unquantifiable global health and economic impacts. The Canadian economy is only beginning to feel the impact of this crisis, and the Government of Canada has put an Economic Response Plan in place to prevent a possible depression. The real estate market will be affected, but the effects will likely be short-lived due to the continuation of fundamental drivers of demand and changes brought by recent events and responses to the outbreak.
Injection of funds by the federal government
The Government of Canada is taking significant steps to help Canadians live through the effects of the COVID-19 outbreak. The Canadian Government’s Economic Response Plan involves the provision of $27 billion in direct support to Canadian workers and businesses and $55 billion in tax deferrals and other financial provisions.
Temporary income support is being provided for Canadians without paid sick leave, who are sick, being quarantined or have to stay home for other reasons such as childcare e.g. an emergency care benefit of up to $900 bi-weekly for up to 15 weeks is being provided as a flat-payment benefit.
As well, over $5 billion is being disbursed in support of workers who may lose their jobs or have to work for reduced hours in lieu of COVID-19.
With a one-time special payment via the Goods and Services Tax Credit (GSTC), over $400 is to be given to individuals, $600 to couples and an additional $300 per child via the Canada Child Benefit (CCB) program.
The filing due date for 2019 tax returns is also being deferred by the Canada Revenue Agency till June 1st, 2020 for individuals and May 1st, 2020 for trusts, for the 2019 tax year.
The Bank of Canada has also lowered its benchmark overnight repo rate to 0.75%, and will likely lower it further after actions by the US Federal Banks to lower their benchmark rate to 0%. Prime rates generally follow the overnight repo rate so those with variable-rate mortgages have seen their interest rates drop in the past weeks and will benefit from further decreases in the rate. To find out more about the impact of Bank of Canada rate on the real estate buyers, readers can find WOWA’s guide about the history and impact of Bank of Canada Rates on the Canadian real estate market.
There is also a provision of wage subsidy for a 3-month period for eligible small-business employers to cover for 10% of remuneration and a maximum of $1375 per employee, and $25,000 per employer.
CMHC initiatives to help the real estate market
The Canada Mortgage Housing Corporation is at the forefront of stabilizing the real estate market during the COVID-19 pandemic. Through measures like the Insured Mortgage Purchase Program, banks are freed up to provide financial support to Canadians. Increasing the issuance amount of Mortgage Bonds is another step that is likely to infuse cash into the real estate market. Other measures like the Mortgage Deferral Program allow homeowners to defer their mortgage payments for a specified period. As a crown corporation with billions in readily accessible reserves, the CMHC is well-equipped to handle the economic challenges that are coming its way.
Mortgage deferrals and borrower assistance
Many mortgages are insured by the Canadian Mortgage and Housing Corporation (CMHC). This is true for almost all mortgages that were made with a downpayment of less than 20%. If you have a CMHC-insured mortgage loan, the CMHC has allowed for payment deferrals for up to 6 months for those dealing with the financial impacts of the COVID-19 outbreak. Other insurers and lenders have followed suit and have also offered financial assistance and payment deferral programs for mortgage borrowers. If you have an insured mortgage, it is likely that you will be able to defer your mortgage payments.
Financial assistance for uninsured mortgages are at the discretion of the lender, but most banks and credit unions have announced similar payment deferral programs for their borrowers. These include top banks such as RBC, BMO, Scotiabank, TD as well as smaller lenders like MCAP and HomeTrust.
Expansion of the insured mortgage purchase program and portfolio insurance
As a proactive means of providing stable long-term funds to banks and mortgage lenders, the Canadian Government is also launching an Insured Mortgage Purchase Program (IMPP) through which it will purchase over $50 billion of insured mortgage pools through the CMHC. As such, there will be continued lending to Canadian consumers and businesses as well as increased liquidity of Canada’s mortgage market. Market liquidity will also be bolstered by the Bank of Canada, which has announced its adjustment of market liquidity operations to maintain proper market functions and credit availability.
On March 26th, the Insured Mortgage Purchase Program was revised and its limit increased by $100 billion to a total of $150 billion in mortgage-backed securities.
How is this move by the Canadian government expected to help residents? By purchasing mortgages from banks and lenders, these measures provide these financial institutions with money and additional liquidity to continue lending money to Canadian consumers and businesses. The program is already in action, with $5 billion in MBS already purchased by the CMHC during March 2020.
In addition to the additional liquidity provided to lenders, eligibility rules for portfolio insurance have been temporarily relaxed, allowing more mortgage lenders to gain access to the IMPP and in effect, lend more to Canadian homebuyers. As of March 24th, portfolio insurance eligibility has been extended to uninsured (low loan-to-value) loans with amortization of up to 30 years and refinanced loans, with additional details to be provided.
Measures to suspend eviction and support renters
Landlords who have CMHC-insured mortgages are expected to make use of relief measures like the mortgage payment deferral program if necessary. With mortgage payments able to be deferred for up to 6 months, landlords are less inclined to evict tenants who, as a result of the COVID-19 pandemic, are unable to make regular rent payments due to job loss or reduction in work hours during this crisis.
Additional tools offered by the CMHC to help homeowners handle financial difficulties include:
- Conversion of a variable interest mortgage to fixed interest mortgage by the CMHC, to protect the homeowner from an unprecedented increase in interest rate.
- Short-term mortgage payment deferral. More flexible payments might be offered if you’ve previously made lump sum prepayments or had an accelerated payment schedule. Both lump sum payments and accelerated payment schedules help reduce your outstanding mortgage balance, which increases your credibility with the mortgage lender. This makes it easier to be flexible with short-term mortgage payment deferral arrangements on account of COVID-19.
- Allowing extensions to the amortizations of insured mortgages. For example, if you change your mortgage amortization period from 20 to 25 years, your monthly mortgage payment would be reduced since the payment is spread over a longer period of time. However, you would be paying more interest over the life of the longer mortgage. You can find out the differences between your payments and total costs by using WOWA’s mortgage payment calculator.
- Special payment arrangements that will depend on your own personal situation
Temporary suspension of CMHC dividend payments
CMHC’s Board of Directors has also placed a temporary suspension on dividend payments. With this prudent measure, more capital is available to be disbursed towards economic recovery from the COVID-19 pandemic.
By the end of 2019, the CMHC had excess capital of $3 billion, and most of it is available for additional financial support to the mortgage and housing system.
Does this mean that the Canadian real estate market will suffer?
It is hard to say. On one hand, many people may lose their jobs or sources of income and may not be able to afford mortgages to buy homes, decreasing demand. In addition, decreases in AirBNB usage and income from rentals may force overleveraged investors to sell their properties. On the other hand, lower rates make financing more affordable and the sharp declines in other assets such as equities may convince investors to invest in land and property. The drop in the Canadian dollar may also increase demand by foreign investors. All in all, the Canadian real estate market has a high chance of being spared a sharp downturn.
Lowered mortgage rates
Effective the 16th of March, 2020, the Bank of Canada has lowered its overnight lending rate by 50 basis points, to 0.75%. As a result, the country’s largest banks have cut their prime lending rates from 3.45% to 2.95%. This has significantly decreased variable interest rates that are based on prime as well as fixed-rate offerings by lenders. As of March 21st, 2019, lenders have begun offering 5-year fixed rates near 2% – a significant decrease from only months before. Barely above the rate of inflation of 2% targeted by the Bank of Canada, real interest rates are close to 0% or may go negative as further rate cuts are made.
Growing attractive of real estate as a “shelter” investment
The sharp declines in global stock markets has led to increased demand for “safe-haven” or “shelter” assets. Real estate, with its steady cash flows and permanence, is likely to be an attractive candidate for many investors. As investors prepare for the eventual recovery, real estate also benefits from its high leverage that can significantly increase returns on invested capital.
Canada is an immigration hotspot, and this is unlikely to change despite COVID-19. While international travel is blocked for now, demand will only continue to build as political and economic instability rises due to the effects of the outbreak. With the decline in construction due to COIVID-19, supply will be lowered while demand will be raised, leading to increased prices in the real estate market.
Lowered costs from the cheaper Canadian dollar
Canada has experienced a sharp drop in the Canadian dollar due in part to the severe decline in oil prices in the past weeks. Lower demand due to decreased economic activity from responses to COVID-19 has combined with dramatically increased supply from Saudi Arabia and Russia and cratered the price of oil, which is one of Canada’s largest exports. The cheaper Canadian dollar will make Canadian housing at current prices even cheaper for foreign investors and will likely lead to increased investment and demand.
Mortgage payment deferrals
While COVID-19 may have an impact on the ability of Canadians to pay their mortgages, it is very unlikely that this would lead to increased sales or foreclosures. Mortgage deferral programs discussed above will allow Canadians to keep their homes and prevent forced selling. In addition, the use of full-recourse mortgages heavily disincentivizes Canadians from allowing their homes to foreclose. This was also one of the factors that differentiated the Canadian and US real estate markets in response to the Great Financial Crisis in 2008.
Despite the likelihood of an economic downturn and impacts on employment by responses to the COVID-19 outbreak, the Canadian real estate market will likely remain an attractive investment as increased demand and decreased costs drive prices higher. Regions directly dependent on oil, however, do not benefit from the same fundamental drivers and may experience a downturn. In times like these, it is prudent to find an experienced real estate agent to ensure prudent investing.