With buyers eager to take advantage of historically low borrowing costs, the inventory of available houses for sale is scant – driving the prices for new homes to record highs and pushing homeownership out of reach for many Canadians. This unsustainable short-term demand will not last though, how will the Canadian housing market perform post-Covid?

What’s Happening?

Canada’s housing market has not only defied expectations of a slowdown, but according to key indicators, it’s booming; during a time when the economic slowdown is comparable to the Great Depression. This poses the questions though – why is the Canadian housing market booming, when will this period of expansion reach its peak, and what’s to come post COVID? We’ll be looking at the key factors fueling the price surge and the primary contributors to our market outlook for post-Covid.

One of the major factors causing the soaring Canadian house prices are the record low mortgage rates which were implemented in order to stimulate the Canadian economy and incentivize consumers to borrow and spend. We see the direct impact of this economic stimulant as July and August both broke home buying records. In the month of August, national home sales rose 6.2% on a month-over-month basis and the national average sale price year-over-year posted an 18.5% increase sitting at $585,000 compared to August 2019. The main players spearheading this price surge seem to be Canada’s city centres with the greatest year-over-year price increase recorded in PEI (+31%), Ontario (+28%), and Quebec (+21%). Nova Scotia is not far behind though, realizing a 19% year-over-year average price increase. The increase in home buying activity is having an effect on the current supply available.

As we continue to study the full effects of Covid and its effect on the Canadian housing market, one thing for sure is that another key driver fueling the housing market surge during the Covid pandemic is the limited supply resulting from the record breaking home sales numbers. With low borrowing rates incentivizing consumers to increase their borrowing and spending activity, the supply of homes required to match the growing demand of home buyers is dwindling at a blistering pace. Alongside the economic stimulants, the demand for home buyers has stemmed both from the macroeconomic environment through the current generational shift of new home buyers, and the microeconomic environment through the increase of individual spending activity. As shown in the Residential Sales Activity chart sourced from the Canadian Real Estate Association, national home sales rose 6.2% month-over-month in August 2020 and the actual (non seasonally adjusted) sales data for August rose by 33.5% year-over-year. This is an astonishing figure and is a record gain year-over-year for the month of august and the sixth highest monthly sales figure of any month on record according to statistics researched by CREA. With the massive demand of housing in Canada right now, the home building construction industry is also booming as a result. This boom correlates with the rising house price in Canada because as there continues to be homes built, we’ll continue to exasperate our supply of lumber and other raw building materials. As we diminish our supply of these raw materials, we can see a reflective increase to the average home price of between $5,000 and $10,000 for a single-family home.

From High Peaks to Low Troughs

As we’ve evaluated, the Canadian housing market is evidently in a boom period right now, but where there’s a boom there’s a bust, or in other words, where there’s unsustainable demand in the short term, there will be an inevitable excess of supply in the medium term. According to the Canadian Mortgage and Housing Corporation’s forecast report made in May, the average Canadian house price is expected to fall between 9 percent to 18 percent before returning to levels pre-COVID in the first half of 2021. CMHC chief economist Bob Dugan stated, “I’m not convinced that we have a sustainable basis for housing demand in the economic disturbance that’s going on related to COVID-19,” he said. “That’s why I say I stand by the forecasts.” Unless a major secondary Covid wave hits, it is pretty unlikely that the forecasted worst-case scenario price drop will happen, nonetheless, it can still be expected that the average home price in Canada should fall roughly 10%  due to the economic shock effecting employment, household income, and lost economic growth as a result of Covid.

The reason for these significant price decreases comes from the unsustainable demand resulting from our prior analysis on why the price increased in the first place. Record low borrowing rates incentivizing home buyers to open mortgage loans at a record breaking quantity, the number of people who are on government funded stimulus packages that will eventually end, and the number of people on mortgage deferral. Therefore, it is expected that there will be a negative percentage price decline in 2021. Significant housing demand has initiated a causal sequence within the housing industry through an influx of housing supply. Construction data on new home starts shows that home starts have surged to its highest level since within the last decade as the Canadian housing market continues to defy pre-Covid expectations of a slowdown. In August 2020, housing starts grew to 262,396 on an annualized basis, elevating 6.9% higher than the already inflated 245,425 units in July. Elevated housing starts acts as an indicator of the extreme demand fueling the Canadian residential starts – primarily multi-residential condo’s – to hit levels unseen of since 2007, with the key players of new home starts being the high population city centre’s such as Toronto and Vancouver.

Performance of XHB vs S&P 500 vs SPTSX  

Another indicator we can use to analyze the Canadian housing market is the homebuilders exchange traded fund. As shown in the following graph comparing the homebuilders ETF, the S&P 500, and the S&P TSX Composite index: State Street’s SPDR S&P Homebuilders ETF (XHB) rallied 110% since the pandemic began and is up 20% on a year-over-year basis compared to the S&P 500’s 46% since pandemic start and 11% year-over-year. This data indicates that the homebuilding industry is performing better than the rest of the market. The extreme increase in home construction, particularly in multi-unit complex’s, introduces the strong possibility of a supply surplus which will be a strong factor in the reduction of home prices in the Canadian housing market within the first half of 2021. According to Rocye Mendes, an economist at Canadian Imperial Bank of Commerce, “The fact that so much of the recent strength has been focused in the multi-unit sector presents a risk,” Mendes continues by saying“As demand from both immigration and students has waned recently, rents have been falling, potentially leading to less interest from investors in the months to come.” Considering how the market is performing right now, it can be expected that the homebuilding construction will slow pace as the year winds down, particularly as mortgage and other loan payments resume after a period which many households took advantage of the deferrals.

Outlook for the Canadian Housing Market

The Canadian housing market has continued to defy expectations of a slowdown this year. We have been able to understand the effects of Covid-19 on the housing market and form a reasonable analysis on the reasons why the market is booming as it is. Government stimulus packages through mortgage deferral programs, income subsidies, and low mortgage rates have all been factors spearheading the industry, driving prices to increase a whopping 18.5% year-over-year as the microeconomic environment shows consumers are borrowing more while the current mortgage rates are sitting at one of the lowest points they’ve ever been. Furthermore, the information we can derive from the macroeconomic environment shows the current generational shift taking place right now is also factoring into the increase in housing demand. This surge in home buying has driven the price sky high, but the question being asked now is, how will we be able to deal with this short-term unsustainable demand in the long-term? If we look at the home starts data above, it’s evident the home building construction industry is focusing on the short-term demand and is booming alongside the home buying industry, with raw materials driving prices even higher. As the demand for housing begins to dwindle in 2021, we can expect the influx of multi-unit housing being built in major city centres as a result of the demand surplus to drive the prices back down around an expected 10%. In my opinion, we’re not out of the Covid heat yet, and we’ve yet to fully grasp the true damage the virus has done to the economy. If you’re a new home buyer, hold off until 2021, demand will be lower, construction costs will be lower, and home prices will be lower. Permitting no change in fiscal policy, the mortgage rates will likely remain stagnant for the time being so now is not the time to break into home-owner club. If you’re a home seller though, you’d benefit to look into offloading, considering until at least 2022, homes are unlikely to be in as high of a demand as they are now.

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