Take a $100k unit that appreciates by 80% in 5 years. It will be $180k after 5 years. You are suggesting that unit will $90k in three years or -10k return over 8 years? I think even you would say that is unlikely.
I do agree that there will be a drop. And it will be large. But these also take time. Therw is usually a larger initial drop (say 10%) followed by a slow bleed of a percent or two per year for a few years till it bottoms out. That's how corrections generally work. And given that this pandemic is a broad shock I agree it goes that way.
50% though is difficult. I believe the CMHC CEO when he said 18%. But that is nationwide. Hard to tell how that plays out in different cities and even different neighbourhoods and market segments.
A -10% return over 8 years is not unlikely, given it has occurred several times/locations in history ... it really depends on timing and context.
The housing markets around the world are cyclical and typically follow business cycles.
3 years maybe too pessimistic for some, while too optimistic for others.
To me, it's a best case scenario where the drop is quick and then flatlines for couples of years before slowly rising to rebuild consumer confidence.
If it's too prolonged and deflationary, people will put off buying in anticipation of further lower values in the future.
Between 1985 and 1989, the average price of a house in the GTA increased by 113%.
Between 1989 and 1996, the average price of a house in the GTA declined by 40% with dt Toronto hit the worst with over 50% decline in value of a home.
A former neighbour, who is a dentist, had bought a house at the 1989 peak for $250,000 and had to sell in 1995 for $150,000 - a $100,000 (40%) loss in 6 years because the debt was too much to service. He had to declare bankruptcy.
That same house did not reach the 1989 $250,000 price until 2003 - 14 years later.
Once inflation is taken into account, they would have 'broke even' in 2008 - 19 years later, which still didn't cover interest costs.
Canadian real estate are in bubbles (worse in Toronto and GVA) and not based on economic metrics, so we could be looking at 50% decline:
* price bubbles are much worse now than 30 years ago,
* ultra-low interests rates that are guaranteed to go up marginally by 2-3% (200-300 basis points) which equals to 20-30% increase in mortgage payment, even after taking into account of principal repayments.
* Canadian household-debt-to-income ratio is 177 % (+/-)
* some properties are highly leveraged for more "investment" properties like STR Airbnb
* HELOCS used as ATMs
* Canadians are requesting relief from their mortgage payments at a breakneck speed.
The CMHC itself estimates 12% of insured mortgages are currently on payment deferral, and they expect this rate to rise to 20% by September.
More generally, the
Canadian Bankers Association (CBA) estimates the big Canadian banks had 500,000 requests looking for mortgage payment deferral in the beginning of April. By the end of May, the handful of large banks had approved 721,000 mortgage payment deferrals. This represents about 14% ( more than $180 billion in mortgages and home equity lines of credit of the $1.24 trillion) in residential mortgages of all mortgages on their books, and that number will climb.
That total represents more than 14% of residential mortgages on the balance sheets of chartered banks
business.financialpost.com
* Canada’s Big Six banks have set aside a lot more cash for bad loans these days. The sum of total provisions for credit losses (PCL) in earnings reports reached $10.92 billion, up from $2.45 billion last year.
* At the end of May, the Canadian government estimates 8.3 million unique applicants for CERB.
Considering Canada’s labour force is just 19.1 million, that’s 43.5% of them requesting emergency aid.
Even after the self-isolating restrictions are removed and people get back to work, I can see the unemployment rate be between 9-11% for the next couple years.
Sure, markets are looking to the future — but can we honestly say medium-term economic prospects look any better
business.financialpost.com
Following a drop of over one million in March, employment fell by nearly two million in April, bringing the total employment decline since the beginning of the COVID-19 economic shutdown to over three million.
www150.statcan.gc.ca
dailyhive.com
business.financialpost.com
