How Long Can Canadian Real Estate Hold Off The Pandemic?

Written by Posted On Tuesday, 27 October 2020 05:00

During the last 20 years, Canada’s real estate bears have often predicted a downturn or full-out crash for the market. And while there have been a couple of brief dips here and there, for the most part they have been wrong.

The pandemic brought real estate activity – and pretty much everything else – to a halt in the spring of 2020 but it has bounced back to produce record sales in recent months. Is this market sustainable? The bears point to softening condominium markets in the downtown cores, along with the end of mortgage deferrals, to suggest that it’s not. But there are others who think the fundamentals of the market will keep it strong in 2021.

“The coming months should provide more precise clues about the market’s direction in the year ahead,” says Robert Hogue of RBC Economics. “We’ll see whether low interest rates and changing housing needs can keep demand boiling hot, or whether the exhaustion of pent-up demand and plummeting immigration will cool things down.”

Sales in August and September set all-time records in Canada. The Canadian Real Estate Association (CREA) reports sales were up 5.8 per cent from the first nine months of 2019, despite the slowdown when the pandemic hit.

In September, the inventory of homes for sale fell while sales rose, creating a sales-to-listings ratio of 77.2 per cent – the highest in almost 20 years, CREA reports. The association says there were just 2.6 months of inventory on a national basis at the end of September, the lowest reading on record for this measure.

Nationally, average prices were up by 17.5 per cent year over year in September. CREA’s MLS Home Price Index was up 10.3 per cent. Ninety-seven per cent of regions recorded price appreciation in the third quarter, according to a survey by Royal LePage.

So is this pace of sales and price appreciation sustainable? “Unlikely,” says Rishi Sondhi of TD Economics. “A wide disconnect between housing, the economy and/or job markets doesn’t tend to be sustained.”  And it’s more likely that housing markets will slow than job fundamentals will improve sharply from here, “given the lasting impacts of the pandemic.”

Sondhi cites three major reasons for a pullback: affordability continues to be a challenge, population growth is slowing due to reduced immigration and interest rates could begin a “modest upward drift” as the economy recovers.

Several factors have been cited to account for the strength in the housing market, including low interest rates, pent-up demand from the spring market that didn’t happen, and the fact that most job losses were suffered by low-wage young people who were probably were not in the market for a home. Government programs introduced to help those with reduced incomes were also a big factor.

“With a relatively large segment of the labour market not experiencing income disruption, more households are in a better position to take advantage of low interest rates – and that combination is the key factor behind the strong housing market performance that we are currently witnessing,” says Benjamin Tal of CIBC Economics.

“Typical consumption patterns have been disrupted in 2020 as the pandemic has driven the household savings rate to levels not seen in decades,” says Phil Soper, president and CEO of Royal LePage. “Most Canadians have sharply reduced spending on discretionary goods and services involving a great deal of human interaction.” He says many people have focused on housing investments, such as renovations to create home offices, or purchasing “a recreational property or a new property better suited to the times.”

Royal LePage forecasts price gains will be sustained through December. “While the pace of price growth is expected to slow considerably in the final weeks of this most unusual year, it is highly unlikely we will see housing values” decrease, he says. 

One segment of the real estate market that is not flourishing is the condo market in the downtown centres. Condo rents have dropped in Vancouver and Toronto due to a combination of factors, such as less immigration, fewer foreign students, former AirBnB units coming on the market and young condo renters moving out of the core to live with their parents or relocate to a larger home in the suburbs. 

In the Greater Toronto Area, the condo rental market “showed some improvement in the third quarter within more suburban areas, while experiencing weakened conditions in the downtown areas as renters reevaluated the costs of living in the central core as most offices, post-secondary schools and entertainment venues remained closed,” says Shawn Hildebrand, president of research firm Urbanation.

“While it was encouraging to see the large increase in lease activity in the third quarter as renters took advantage of recent discounts, the market will continue to face challenges heading into 2021 from restrained demand caused by COVID-19 and elevated supply levels.”

Sondhi says while some people may be looking to leave condo living behind for a detached home and make more space for themselves as they work at home, the trend may not last long.

“In Toronto and Vancouver, this shift is likely being supported by the fact that condo prices have appreciated at a stronger rate than single-detached units in recent years, leaving condo owners significant equity to use to trade up into these larger units,” he says. “However, once a vaccine is widely available, it’s possible that condos outperform as they represent the most affordable window into homeownership (particularly as the detached market remains chronically undersupplied and the attraction of big-city living resumes). Notably, since the Financial Crisis, condo sales have generally outpaced those of single-detached units in Toronto, Vancouver and Montreal.”

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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