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Ongoing economic fallout from Covid-19 will see Canadian housing prices decline next year before rebounding in 2022, Fitch Ratings says.

In a new report on the global housing market, the rating agency forecasts that Canadian home prices will decline by 3% to 5% in 2021, following a 7% increase this year.

“We attribute the expected decline to lower demand caused by elevated levels of unemployment and increasing affordability issues,” Fitch said.

Fitch said that it expects the unemployment rate to fall to 7.8% in 2021 from 9.5% in 2020 — still well above the 6.3% average for the previous five years.

“About 15% of the workforce are self-employed and have been hit the hardest by the pandemic,” the rating agency said.

At the same time, factors such as declining rents, a falloff in immigration due to the pandemic and the impact of stress tests for mortgage affordability will also pressure home prices by undermining demand, Fitch said.

For instance, the report noted that rents are down by 10%-15% in major cities, which is “making home ownership less attractive.”

Immigration dropped by 41% in the first seven months of 2020, and Fitch said that it expects immigration will remain subdued through 2021, further reducing housing demand.

Finally, the stress test requirements will also weigh against demand as potential buyers will be screened out.

Alongside the decline in home prices, Fitch also expects an increase in existing borrowers falling behind on their mortgages in 2021 as payment holidays come to an end.

Currently, up to 16% of all mortgage borrowers are on a payment holiday, the rating agency noted.

As this relief expires, Fitch expects delinquencies to rise by 0.35%-0.50% next year.

“Although we expect delinquencies to increase in 2021, we do not expect the level of delinquencies, distressed sales or foreclosures to increase to the levels seen in the U.S. during the financial crisis,” Fitch said.

“This is due to servicers having strong relationships with their borrowers and their close monitoring of their borrowers’ financial situations after putting them on payment plans.”

While the housing market faces several headwinds in 2021, conditions are largely expected to return to normal in 2022 as the economy recovers.

Fitch said that it expects both prices and delinquencies will return to pre-pandemic levels in 2022.