Canada’s national housing agency wants to remind people there’s a limit to what they can do. Evan Siddall, CEO of the Canada Mortgage and Housing Corporation (CMHC) updated Canada’s standing committee on finance. In the update, he explained how the CMHC is using tens of billions in capital to support real estate markets. Even so, they warned first-time homebuyers to be prudent with their investment. The organization can help lower risk, but can’t eliminate it. Consequently, they expect prices to make substantial declines in the near-term. Here’s the most important insights from that speech.

The CMHC Will Support The Housing Market

The CMHC is on an epic journey to try to contain the damage the economy is inflicting on home prices. They reiterated they are ready to buy up to $150 billion in mortgages, expand securitization, and extend deferrals. Currently they estimate 12% of mortgages are on payment deferral. They expect this number to rise to 20% by September. In other words, this is a huge (and expensive) operation they are undergoing. However, they warned their “support for homeownership cannot be unlimited.” After all, if the organization incurs substantial losses, it will require taxpayer help. Who wants higher taxes because Joe Vancouver put 5% on a 300 sqft condo at nearly a million dollars, thinking it can never go down in price? Probably not you.

Canada’s First-Time Buyers Warned To Think About Debt

The agency also stated they “need to avoid exposing young people” (and taxpayers in general) to losses. As a cautionary tale, Siddall explained a scenario for a first-time homebuyer forced to sell. If that buyer bought a $300,000 home with 5% down, they stand to lose $45,000 on an investment of $15,000 if prices fall just 10%. They further added those numbers include insurance, and the cost of selling. To contrast, they note a 10% down payment could better help that person ride out a downturn.

I know what you’re thinking – where can I buy a $300,000 home? Not the point, but most selling costs are relative. Scale that number to whatever you like, the point is a buyer with just a 5% downpayment can lose more than the 5%. There’s insurance, selling fees, and the difference in the price if underwater.

Canadian Real Estate Prices Expected To Drop Up To 18%

The 10% downturn isn’t unrealistic either, since they’re forecasting that on the low end. The agency is now forecasting the average house will see a decline of 9 to 18% over the next 12 months. The organization previously stated prices will drop, and won’t rise to their 2019 values until 2022 – at the earliest. They haven’t officially released a full forecast yet, but from statements made, the organization’s internal forecasts appear to be in-line with other non-bank forecasts.

The CMHC is delivering general risk advice that can be summed up as don’t take out too much debt. The higher the debt load of a household, the more vulnerable you are to a downturn. This downturn is expected to be the largest since the Great Depression – so it’s probably time to buckle down. Although they did give first-time buyers common advice, it’s hard to get a generation of people to understand risk, if they haven’t seen a downturn. Equity traders call this “market tuition,” since most people won’t learn about risk until they lose a substantial amount of cash.

CMHC Warns Canadians : “Support for Homeownership Cannot Be Unlimited” by Better Dwelling