In the third wave of the COVID pandemic, the short-term future of Canada’s economy seems uncertain. It’s possible we’ll see more of the fiscal conservatism that’s characterized the last 18 months. As an example, mortgage lending guidelines are set to tighten further, with the Office of the Superintendent of Financial Institutions (OSFI) recently confirming the stricter stress test will come into effect June 1. This is set to fuel an already accelerating demand for private lending. Over the longer term, the Bank of Canada’s interest rates are expected to remain lower bound until the second half of 2022, meaning we’re likely to feel the economic repercussions of the pandemic for at least the next year.
The shorter term forecast is an interesting question for mortgage investors in Canada, particularly in light of vaccination targets. Nearly 50% of eligible adults have had one dose, but fewer than 5% have had the two doses required to achieve substantial immunity. If we reach our vaccination target by September, how will that affect the real estate market? If the vaccine rollout is delayed, what will that mean? Below is our overview of how mortgage investments have held up during the pandemic, and the changes we anticipate in the next six months.
Our Lending Strategy During and After COVID
The beginning of the pandemic saw a sudden and dramatic dip in the economy as everyone put the brakes on business. For borrowers, this meant a sudden drop in cash flow as more people were laid off or furloughed.
For CMI, that meant adapting our lending focus in terms of the types of loans we offered. We took a progressive approach to deals to accommodate those who were laid off or out of work, which meant providing the option of prepaying mortgages for the whole term to give borrowers time to get back on their feet. We also increased the geographic diversification of our loan portfolio in step with increased real estate activity outside of urban markets.
A New Boom in Small Communities
While mortgage investing has traditionally been very focused on opportunities in large urban centres, the pandemic has seen real estate in smaller communities flourish. New remote working arrangements have given Canadians more flexibility to move away from large urban centres, as they no longer need to commute to work. And although the beginning of 2021 has seen a rebound in traditional employment, many Canadians are still working from home. This has ultimately led to an unexpected real estate boom in smaller communities, in spite of unemployment rates.
While low interest rates and tightened restrictions on borrowers have made lenders reluctant to take risks, this movement has built investor confidence around opportunities outside of major centres. There have always been compelling opportunities outside of cities, but the new shift adds weight to their importance moving forward.
Will COVID Vaccines Impact the Market?
Accommodation and food services sectors were hard hit by the pandemic, but the real estate sector in Canada has suffered less of a fallout. Over the course of the pandemic, people’s focus shifted towards their homes; many homeowners made renovations and recognized the need for more space. As a result, the real estate market has seen growth over the course of 2020; according to RE/MAX, 52% of Canadians “believe that real estate will remain one of the best investment options in 2021.”
Looking ahead, CREA’s Economist Ryan Biln predicts we may see an influx of newcomers ready to buy homes as Canada’s borders open up post-vaccine, particularly with Canada’s ambitious immigration targets. Ultimately, however, we think that while the vaccine may have a positive impact on the real estate market, the relative robustness of the real estate market throughout the pandemic means that the vaccine arrival date won’t make as much of a difference to real estate as it will to other sectors.
Mortgage Lenders see a Silver Lining
As more people see the light at the end of the pandemic tunnel, we anticipate that the real estate market will see steady growth. Investors and borrowers will become more confident, but a more conservative approach from banks will mean more opportunities for mortgage investors. The RE/MAX Canadian Housing Market Outlook predicts that, “Heading into the new year, 84 per cent of RE/MAX brokers and agents surveyed are anticipating sellers’ markets.”
In its most recent Industry Insights Report (Q4 2020), TransUnion provides a further silver lining for mortgage investors: Canadian borrowers prioritized mortgage repayment ahead of other debt obligations, a trend the credit reporting agency attributes to the proliferation of work-from-home arrangements and the steady, record-breaking climb of residential real estate prices.
The balance of 2021 will see promising opportunities for Canadians looking to invest in private mortgages.
CMI has a proven track record in the private mortgage market, having successfully funded more than $650 million in loans across Canada. Get in touch with one of our Investment Account Managers to learn how we can put private mortgages to work for you.