Okanagan rental housing market facing challenges due to COVID-19

The impact on real estate markets remains a wildcard

Paul Taylor (mugshot)

Paul Taylor (mugshot)

As the mortgage deferral program concludes and the COVID-19 pandemic teeters on the verge of a second wave, the impact on the real estate industry is likely to be felt most on the rental market, according to the president and CEO of Mortgage Professionals Canada.

Paul Taylor predicts a softening of the rental investment market because of a decline in rental revenue.

Taylor cited two key factors for fueling that decline. One is the slowdown in the tourism industry, hampered by pandemic induced travel restrictions, which has cut into the short-term rental revenue opportunities for property owners.

The other is the reduced level of immigration to Canada, down from the average 500,000 a year, new residents who quite often can afford only rental housing initially.

Turbulence in the rental market is further complicated by the recent emergence of substantially hiked reinsurance rates for condo strata developments.

“Seeing that kind of massive hike in insurance premiums makes it harder to qualify for purchase in the condo environment. I’ve heard of rates doubling, tripling, quadrupling, even on a case where the increase was 10 times over…which will impact the cash flow of people living in condos and the ability of others to qualify as a first-time buyer,” Taylor said.

“There are no immediate solutions for that at this point.”

Taylor gave a virtual presentation to the Okanagan chapter of the Urban Development Institute on Thursday (Sept. 24) about expectations for the ongoing impact of the COVID-19 pandemic on real estate markets across Canada, saying while predictions based on historical trends become harder to quantify, government intervention in the mortgage industry has brought stability to the marketplace lacking in many other countries which bodes well for our collective economic recovery.

With COVID remaining an economic impact wildcard heading into the fall, Taylor said the Canada Mortgage and Housing Corporation has projected a nine to 18 price drop in single-family homes, but Taylor expects a combination of lack of supply and buyer demand will keep prices stable in the short-term.

“September and October are going to be a somewhat of a transition period, as you see the deferral program for mortgage holders ending,” he said.

Taylor blamed “media miscommunication” for initial coverage of the mortgage deferral program, originally intended only for people who needed the financial assistance.

But that message was lost as the initial onslaught of interest overwhelmed the ability of banks to carry out a needs test for every applicant, so possible restrictions were essentially tossed out the window to make the program available to any mortgage holder on request.

“Canada Mortgage and Housing Corporation says 760,000 mortgage holders enrolled in the program, about one in six mortgage holders in Canada, but the reality is many of those people didn’t need the deferral, it was just an opportunity to take advantage of,” Taylor said.

“So the one positive is as most mortgage holders come out of that program, they will be on solid financial ground. Some will be in harm’s way but for the larger majority, they found ultimately they did not need that cash flow relief.”

He said additional “stress tests” imposed on first-time mortgage applicants, in an effort to address the rising debt ratio for Canadians, has also hampered the housing industry, but he expects to see some leniency going forward on interest rates that will expand the income to debt qualifying limitations.

“An awful lot of people spent more on rent than on mortgage payments based on the current stress test standards…there has been a slight reduction from the Bank of Canada rate set at 4.79 per cent down to 3.99 in February…but if we could reach an equilibrium of about two per cent we would be more supportive of that.”

He cited the example of applying for a mortgage at a 1.99 interest rate and $40,000 down payment provides a maximum purchase power of $685,000. If applying the Bank of Canada rate of 4.79, that purchasing power is reduced to $517,000.

“We don’t advocate people maxing out their available income on a mortgage payment because it leaves no flexibility to deal with unexpected expenses that come along. But you can see where raising the qualification standards for first-time buyers makes it difficult to get into the single-family home market,” he said.

READ MORE: Trudeau stresses vigilance, announces vaccine pact as COVID-19 cases reach 150,000

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