My Mortgage Blog

Last year we explored some of the potential paths Canada’s post-pandemic recovery could follow.

They included the “alphabet soup” of predictions, including V-, U-, W- and L-shaped trajectories.

Just last week, the Canada Mortgage and Housing Corporation (CMHC) released the results of its stress testing of the several of these potential recovery paths. Here’s what they found.

CMHC outlined the following “plausible” scenarios…

U-shaped recovery – Moderate impact

  • In this scenario, pandemic measures are successful and economic activity sees a steep but short decline—a peak-to-tough decline in GDP of approximately 7%.
  • Potential decline in house prices of up to 34%--over an eight-month period— and peak unemployment of 15% for a period of six months.

W-shaped recovery (with government support) – Severe impact

  • This assumes a partial recovery, followed by a return of COVID-19 outbreaks, “loss of confidence and prolonged recession,” CMHC wrote. This scenario also assumed a sharp decline in equity and oil prices.
  • This scenario resulted in an estimated 37% decline in home prices (over 11 months) and 24% peak unemployment.

And the following “implausible” scenario…

W-shaped recovery (without government support) – Very severe impact

  • Similar to the scenario above, but without no government intervention.
  • CMHC said this unlikely scenario could result in a nearly 50% decline in house prices over a 12-month period and peak unemployment of 25%.

It’s important to note that none of the above scenarios are predictions or forecasts, but a stress testing exercise to understand how CMHC would cope under such extreme “theoretical” situations. Canada’s national unemployment rate currently stands at 8.6% as of September. Pre-pandemic in early 2020 it was 5.6%, and reached a peak of 13.7% in May 2020.

In all but the last scenario, CMHC said it would remain solvent and well-capitalized. It also estimated a range of losses in mortgage loan insurance between 2020 and 2029 of anywhere from $3.6 billion to $15.3 billion.  To put that in perspective, as of Sept. 30, CMHC had earned $1.16 billion in net income and reported excess capital of $5.3 billion.

“Stress testing exercises like this are an essential part of effective risk management and vitally important to the long-term health and stability of Canada’s housing finance system,” said Nadine Leblanc, Chief Risk Officer at CMHC.

The “K-shaped” Recovery

Despite the focus on the “U” and “W” recoveries, many have suggested Canada is instead experiencing what has been dubbed a “K-recovery.”

This describes a diverging economy, where certain sectors, such as technology and software services, enjoy a quick and sustained recovery, while others, like food, hospitality, entertainment and travel, continue to decline.

In other words, some in society thrive, while others are struggling to survive.

Homeowners have so far found themselves on the letter K’s ascender. After a brief but severe pullback in home sales in early 2020, demand and prices rebounded for the latter half of the year.

In terms of the agency’s current forecast for the housing market, CMHC has stuck with its initial estimates first released last May. At that time, CMHC had forecast a pre-pandemic peak-to-trough decline in home prices of between 9% and 18% before starting to recover in 2021, and return to their pre-pandemic levels by the end of 2022.  

That prediction has—so far, at least—been off the mark, with the MLS Home Price Index ending 2020 13% higher year-over-year.   

Aside from CMHC’s more bearish forecast, expectations for house prices in 2021 range anywhere from -5% (Fitch) to +9.1% (the Canadian Real Estate Association).

For its part, RBC now sees the national benchmark price advancing another 8.4% this year to $669,000 thanks to “supercharged” demand, but is calling for a “soft landing” in 2022.  

“We see price support softening gradually over the course of the year… setting the stage for a more modest 3.9% appreciation in 2022,” wrote economist Robert Hogue.



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