The Canadian Mortgage and Housing Corporation (CMHC) recently hinted that they may be increasing the minimum down payment to purchase real estate from 5% to 10%. The reason for this would be to ensure that first time homebuyers have additional equity to protect themselves against potentially falling real estate values due to the pandemic.
Will Home Values Fall?
While there is so much uncertainty out there right now, one thing that we can be certain of is that our economy has taken a beating. More than three million Canadians are now out of work, and many more have seen reductions in pay. CMHC’s concern is based on their anticipation of higher mortgage defaults, which would result in a larger number of new listings being released into the market.
More inventory without a comparable increase to the number of buyers would result in a drop to real estate prices. The housing market would then shift from a sellers market to a buyers market, which is something we have not seen in over ten years.
As of now, the housing market is still healthy, despite a small decline in values. The ratio of buyers to sellers is in line, which is keeping home prices in check. An influx of new listings coming onto the market without a similar increase in the number of buyers would create an unbalanced ratio, which would then result in falling home prices.
But will this happen? Will the number of defaults increase to a level resulting in more people being forced to sell? Anything can happen of course.
Businesses are starting to re-open however, and more people are starting to go back to work. With a little luck, this will continue. My biggest concern is that many seem to be looking at the re-opening of businesses as a sign that we are now back to normal, and therefore social distancing is not as important. We’ve already seen evidence of this. This mentality could lead to everything shutting down again. We would then have a problem, which could result in real estate values falling.
Why Is The Increase To Minimum Down Payment Being Considered?
The reasoning for CMHC to potentially increase the minimum down payment to 10% is to protect first time homebuyers from falling values. More down payment means more equity up front, which increases the likelihood of first time homebuyers maintaining positive equity in a declining market.
While that seems logical, I think this is a bad idea.
If an excess number of listings are being released, then this will offset the healthy ratio of buyers to sellers, which would then result in home values dropping. In order words, we would see more sellers than buyers.
If the ratio of sellers to buyers becomes unbalanced, why introduce measures to further upset the balance? It’s hard enough for first time buyers to get into the market as it is, so why choose now of all times to make things harder for them?
Even IF real estate values were to drop, CMHC predicts that they would return to pre-COVID levels by 2022. While this doesn’t sound too bad, I personally think this is quite pessimistic.
As we start to get through this pandemic, which we are starting to see evidence of now with businesses re-opening, it’s just a matter of time before the market starts booming again. I would expect to see this happen sometime in 2021, if not by the end of this year. During the down time, pent up demand continues to build. I would expect the market to be on fire by 2022… not just returning to pre-COVID levels, but exceeding them.
Is Protection For First Time Homebuyers Required?
Even if CMHC is correct on their prediction of the market returning in 2022, what protection is needed here?
If someone were to buy now with 5% down, and if the market were to fall by 20%, yes, they would owe more on the home than it was worth. The same would apply if the minimum down payment were 10%. However, a 10% minimum down payment would eliminate many potential buyers, forcing values down even further. It’s all relative.
Even if values do fall, does that mean that the new homeowner would have lost money?
The answer for the most part is no. They have not lost anything. They would only have a problem if they needed to sell at that time. As CMHC is predicting that the market will return to pre-covid levels by 2022 (which are slightly higher than they are now), then there should not be a major concern for most. Very few people sell within two years of purchasing their home, therefore the number of people affected would be minimal.
Again, there is nothing to say for sure that the market will drop, and I still maintain that if we do see a drop, it will not be anything major. As of now, CMHC has only hinted at the idea of raising the minimum down payment amount. Will they come through with this? We will soon find out.
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The Paul Meredith Team will be donating $250 to local food banks for every mortgage we fund from April 30-July 31st, 2020.
With well over one million Canadians now out of work, the food banks need our help more than ever.
For this period in 2019, we closed 93 mortgages, which would have meant a donation of $23,250! We want to exceed this number this year! Regardless of whether you are purchasing, refinancing, or have a mortgage coming up for renewal, all closed mortgages closed through the Paul Meredith Team will add to the total donated.
Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank
– How to Win The Mortgage Game in Canada, and has ranked as one of the top
75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage
Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on
season two of TV’s Top Million Dollar Agent.