There has been panic in the housing market since Canada’s housing regulator predicted a steep fall in prices a few months back. But, at the same time, almost all Canadian banks remain confident about the housing market prices, despite the dreadful pandemic.
Canada housing market crash
The naysayers are of the opinion that the sizeable Canadian household debt makes the market more susceptible to crash. Households with a high amount of debt might not sustain the prolonged economic blow and will be forced to sell their houses. This will, in turn, disrupt the housing market demand-supply and push the prices significantly lower.
The Canada Mortgage and Housing Corp. (CMHC) forecasted around 9-18% price correction in 2020 before it recovers by mid-2021. The UBS Global Real Estate Bubble Index 2020 put Toronto in the risk zone.
Interestingly, the household debt-to-income ratio dropped in almost the entire country during the second quarter of 2020. The lower the ratio, the lower the vulnerability of the housing market as a whole. The Q3 2020 numbers will be out early next year.
The key reason behind the drop was the increase in incomes, which came in the forms of CERB (Canada Emergency Recovery Benefit) and other government aid. Canadian federal support and its extensions will likely bode well for the economic stability amid the pandemic for the next few quarters as well.
Higher savings provide a higher buffer
Another positive sign that lowers the housing market vulnerability is the increase in savings. The household net savings rate during the second quarter of 2020 jumped to 28% against the historical average rate of 3.7%.
Driven by the federal support and stay-at-home orders, Canadians managed to save close to $100 billion during Q2, approximately 10 times pre-pandemic levels. These strangely higher savings will provide the necessary financial cushion to Canadians and, ultimately, the housing market.
The second wave of the coronavirus pandemic also might not significantly damage the economic recovery. The job market stayed relatively strong in October, even when restrictions were re-imposed in many parts of the country. The unemployment rate in Canada was 8.9% in October, marginally improving from the month earlier.
Also, as the job market is slowly but steadily recovering, Canada’s interest rates are expected to remain near zero through 2023. This might encourage potential homeowners to strike a lucrative deal, pushing up the demand.
The vaccine news from Pfizer is certainly positive in many ways. A vaccine launch could subside uncertainties, which will restart corporate investments, eventually creating a greater number of jobs.
Some major cities like Toronto and Vancouver have indeed seen supply glut and decreasing rents. However, other portions of the market have seen a consistent increase in the prices of single-family homes. The expected increase in immigration next year should increase demand, further boosting prices.
Canadian banks amid housing market uncertainty
Banks’ earnings are highly dependent on a strong property market. Royal Bank of Canada (TSX:RY)(NYSE:RY), the country’s biggest bank, has more than half of its total loan exposure to the housing market.
While TSX stocks at large wholly recovered from their pandemic lows, RY stock is still trading 12% lower against its pre-pandemic levels. It might continue to trade subdued amid the overall economic uncertainty.
However, as fears about the housing market crash gradually wane, Canadian bank stocks, including Royal Bank, will likely see a stable recovery. It yields 4.4%, higher than TSX stocks at large. Also, prudent provisioning at Royal Bank should protect its bottom line from a significant dent.
The Canadian housing market looked ripe for correction a few months back, but currently, the crash seems unlikely.
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Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.