Real estate prices in Canada to fall by up to 26%, Bay Street firm warns


Real estate prices in Canada could take a big drop, Bay Street researchers warn. Veritas Investment Research, a leading Canadian company, sent institutional clients a real estate forecast. The firm warned that drops in house prices are unlikely, except in the event of a supply shock. They now believe that the supply shock could come soon and cause prices to drop as much as 26%.

About the numbers

Veritas analysis is intended for investment managers, so it is different from a banking forecast. The firm used regression analysis in its conclusion with various risk scenarios. They concluded that months of inventory had the highest correlation with price. Recently the market has been tight, leading to higher prices during a recession. They believe that is about to change when mortgage deferrals expire and things return to “normal”.

The business model is based on a mortgage payment deferral percentage that turns into inventory. They gave scenarios for 5%, 10% or 15% of owners with carryovers turning into sellers. This is not the same as assuming they will default. While some people will default, you usually never default if you can sell first. The tight supply of housing in Canada means that most people can make it, instead of falling short. This is also a point that CMHC has recently made, so it is not a wild assumption. This is actually an ideal scenario.

Also adding first, they have warned customers about the uncertainty during the pandemic. Since almost nothing was predictable, they advise customers to keep a close watch on inventory months. In other words, do your own due diligence, but that’s what they’re watching and waiting for right now.

Real estate prices in Canada to drop by up to 11%

Real estate prices in Canada are expected to experience modest to large declines. The company’s model suggests potential price cuts of between 4 and 11 percent. As stated earlier, this is based on the assumption that inventory will increase due to carryovers that turn into listings. This does not include the additional supply, which Canada is currently building in record quantities and which is often returned to resale markets.

Toronto real estate prices could drop as much as 26%

Toronto real estate has the biggest dive in forecasts. The company expects a potential price drop of between 15 and 26 percent. For the regional models, they assumed that the distribution of deferrals was similar to that of all real estate markets. However, CMHC carry-over data shows that Toronto may be over-represented in carry-overs.

Vancouver real estate prices drop by up to 17%

Real estate prices in Vancouver are expected to drop smaller than in Toronto. The company sees a potential price drop of between 10 and 17 percent. Once again they assume a proportional distribution of carry-overs. It should be mentioned that CMHC also planned smaller price cuts for Vancouver. However, their numbers did not show a price recovery as fast as in Toronto.

The firm expects this price movement about six months after the inventory increase. The timeline brings it pretty close to when CMHC made the forecast. The forecasts are a little more aggressive than those of banks and other special interests. However, this is similar to what other institutional risk consultancies have predicted. It is also similar to the state backed mortgage insurer of Canada.

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