Housing inventory could swell when deferral period ends – analysis

A housing inventory surge will likely precede a predicted arrears spike once payment deferrals end, according to a Better Dwelling analysis.

With the total balance of mortgage payment deferrals reaching $247 billion as of the end of the second quarter, Canadians have come to heavily rely on lenders’ deferral options to stave off the worst economic impacts of the COVID-19 pandemic.

However, these well-intentioned programs had the unintentional effect of providing a false sense of security.

“Since people haven’t seen any defaults or distressed sales … people now think housing markets have no risk,” Better Dwelling said. “This is only temporary. As these deferrals expire, we approach the cliff. Once we get there, a significant number of people that haven’t got back on their feet will start to surface.”

The widespread lack of liquidity will become more apparent in the first few months of 2021, with arrears manifesting on January at the earliest. In the interim, many struggling Canadians will be thus forced to put up their properties for sale.

“The inability to pay doesn’t always turn into defaults when there [are] buyers,” Better Dwelling said. “Instead, people list their homes for sale and hope it sells and closes before the lender tries to claim it. … We should see a spike in inventory first.”

And while improved supply would be a good thing generally, it will introduce grave risks in the context of a post-deferral market.

“Rising inventory tends to give buyers more options, which turns into longer selling times. When you can’t dispose of your home in a timely fashion, that’s when defaults rise,” Better Dwelling said. “Rising inventory is expected later this year, and defaults are forecasted to climb next year.”