Will the Canadian Housing Market Crash in 2020?

Could the coronavirus pandemic trigger the Canadian housing market crash that some of us have been expecting over the years?

edit Back view of hugging couple standing with real estate agent in front of house for sale

Image source: Getty Images

The coronavirus (COVID-19) isn’t the only thing that could trigger a brutal Canadian housing market crash this year. The sudden collapse in oil prices as a result of the coronavirus-induced demand shock has severely exacerbated the unprecedented rise in unemployment from coast to coast.

Such a one-two punch could very well trigger the Canadian housing market crash that some have been talking about over the past few years.

Credit is now hard to come by, the national unemployment rate is skyrocketing, the Canada Emergency Response Benefit (CERB) may not be enough, and mortgage deferrals may prove to be a temporary response that only serves to delay the inevitable Canadian housing market crash.

If furloughed employees aren’t rehired over the near- to intermediate-term, we could see another wave of mortgage defaults like during those witnessed in the 2007-08 Financial Crisis.

Real estate investment trusts (REITs) have taken a brunt of the damage amid the coronavirus downturn (some retail and office REITs lost well over half of their value).

And if that’s any indication of what’s to come for the Canadian housing market, investors should seek to limit their exposure to uninsured mortgages should they be next in line to sour.

Canadian housing market crash: A growing possibility amid the coronavirus pandemic

You can only defer mortgages for so long.

I see mortgage deferrals as akin to the teaser rate period in the lead-up to the Financial Crisis. Although there’s no foul play this time around, the mortgage deferral period, like teaser rate periods prior to 2008, do not make for a sustainable payment plan over the long haul.

They both assume that the income of the mortgagor will be at a level to meet payments after the expiry of each respective period — an assumption that may not be safe to make.

There is still hope for the housing market should a return to normalcy be in the cards this year. But the longer the pandemic drags on, the higher the odds that a Canadian housing market crash will occur.

If deferrals continue dragging and employment never recovers to pre-pandemic levels, I wouldn’t at all be surprised to hear default as the “d” word that follows deferrals.

That’s the real risk that comes with being a mortgagor. Only time will tell whether the Canadian housing market is going to crumble as it did just over 12 years ago, but if you’re not of the belief that we’re in for a V- or U-shaped economic recovery, it may be wise to steer clear of stocks with a large number of uninsured mortgages like CIBC, the bank viewed as the most vulnerable to a Canadian housing crash.

Many pundits were previously in the belief that the hot Canadian housing market would cool off gradually rather than implode violently. But you need to remember that none of these folks foresaw a pandemic nor the catastrophic implosion in oil prices.

Who knows what these same pundits see happening now?

The odds of a Canadian housing market crash seem to be increasing

I urge investors not to entirely rule out the possibility of a housing market crash happening within the next two years, especially if the recent bout of job losses are not as temporary as they seem and the pandemic continues to take a toll on the global economy.

I’m an optimist, however. And I do think we’re in for a V- or U-shaped economic recovery once the risk of contracting COVID-19 is lowered drastically. A majority of mortgage payments could very well be back on their regular schedule as soon as a few months, and a disaster could be averted.

However, there’s always a chance that the economy could be crippled for a longer duration should a second wave of the coronavirus spark another lockdown, devastating the incomes of Canadians for a longer duration.

As nice as it is to be an optimist through these dark times, you must weigh the risk/reward and always consider the bear case — a Canadian housing market crash.

Foolish takeaway

With all the uncertainty regarding the coronavirus, I’d argue that the bear case is detrimental, and one should seek to limit their exposure to the insured mortgages if they can help it.

The problem isn’t about the credit quality this time around; it’s an unforeseen health disaster that could spread to even the prime mortgages.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Coronavirus

little girl in pilot costume playing and dreaming of flying over the sky

Air Canada Stock: How High Could it go?

AC stock is up 29% in the last six months alone, so should we expect more great things? Or is…

Read more »

eat food

Goodfood Stock Doubles Within Days: Time to Buy?

Goodfood (TSX:FOOD) stock has surged 125% in the last few weeks, so what happened, and should investors hop back on…

Read more »

stock data
Tech Stocks

If I Could Only Buy 1 Stock Before 2023, This Would Be It

This stock is the one company that really doesn't deserve its ultra-low share price, so I'll definitely pick it up…

Read more »

Aircraft Mechanic checking jet engine of the airplane

Air Canada Stock Fell 5% in November: Is it a Buy Today?

Air Canada (TSX:AC) stock saw remarkable improvements during its last quarter but still dropped 5% with more recession hints. So,…

Read more »

Airport and plane

Is Air Canada Stock a Buy Today?

Airlines are on the rebound. Does Air Canada stock deserve to be on your buy list?

Read more »

A patient takes medicine out of a daily pill box.

Retirees: 2 Healthcare Stocks That Could Help Set You up for Life

Healthcare stocks offer an incredible opportunity for growth for those investors who look to the right stocks, such as these…

Read more »

sad concerned deep in thought

Here’s Why I Just Bought WELL Health Stock

WELL Health stock (TSX:WELL) may be a healthcare stock and a tech stock, but don't let that keep you from…

Read more »

healthcare pharma

WELL Stock: The Safe Stock Investors Can’t Afford to Ignore

WELL stock (TSX:WELL) fell 68% from peak to trough, and yet there's no good reason as to why. So now…

Read more »