The Canadian Housing Market: More Questions than Answers?

The Canadian Housing Market: More Questions than Answers?

The Canadian Housing Market is going through turbulent times as of late, with a 57% drop in sales activity for April. April also saw a year-on-year decline in the average price of houses sold. Things have changed considerably since the Canadian Real Estate Association (CREA) made their forecasts in December last year, which estimated that the Residential Market was expected to grow at a rate of 8.9%.

So far in 2020, real estate prices have remained relatively stable compared to other months, due to housing supply restrictions and economic activity picking up slowly as the economy reopens. But with the high level of unemployment in the Canadian economy, the dynamics of the Canadian housing market is poised for an uncertain future.

The Canada Mortgage and Housing Corporation (CMHC) believes that the worst is not yet over for the housing markets. With high debt loads on the Canadian consumer, and a pandemic shredding through the once strong job market, there is a possibility that the prices may fall 9% to 18% in the coming 12 months.

A look across the country

The average price for homes sold dropped only marginally, by 1.3%, in April when compared to the April figure in 2019. We are in the early days of the effects of the coronavirus on the Canadian housing market, and there is scope for a further correction, given the economic implications that the lockdown holds.

Real estate itself is a very illiquid asset. We cannot reliably say how much housing prices have dropped this month because, simply, there have not been enough sales.

In terms of the level of leverage, the ratio of gross debt as a percentage of GDP for Canada stood at 99% before the pandemic. This is amongst the highest across all developed economies. With a moratorium in place and the GDP not doing well, the figure should rise further on average. CMHC forecasts that with GDP numbers not expected to improve in the near term, the figure could reach up to 130% in Q3-20.

The increase in the number of people seeking a delay in mortgage payments should also be considered as an indicator that would translate into lower demand for homes in the housing markets. As unemployment levels remain at alarming levels, the demand-supply mismatch could bring down the prices drastically, as anticipated by CMHC.

Bank of Canada’s outlook

In an environment of reduced demand, the “Business Outlook Survey – Spring 2020” by the Bank of Canada presents a better picture of the supply of houses. In terms of economic activity, industries tied to the construction of houses was one of those least affected by the pandemic, as construction was declared an essential service and allowed to continue.

However, the demand side is still fairly weak with people looking to park their funds in household savings, rather than splurge on one of the largest assets they will buy in their lifetimes.

The bank also believes that the vulnerability of the Canadian housing market is high since most people don’t have enough liquidity to cover their loans in stressful times. A recent survey by the Canadian Payroll Association suggests that almost half of workers are living paycheque to paycheque. 

Only 40% of buyers can cover loans for up to six months in case they are unemployed. With a prolonged economic slowdown, the liquidity of households could worsen. In such a situation, the Bank of Canada does expect default rates to increase.

RBC Economics offers a gradual recovery

In contrast, a report by RBC Economics, Focus on Canadian Housing”, believes that April was the lowest point for 2020 in the Canadian housing market. The month of May brought about marginal upswings in new listings, as well as in the resale market. With economic activity picking up as several provinces move along in their phased reopening, there is still hope of revival in the remaining months of the year. There could be pent up demand and buyers looking to take advantage of a short-term pullback in prices.

The low-interest rates along with liquidity infusion in the financial system should also help in a steady recovery. However, RBC Economics believes that the recovery is going to be a “gradual and uneven one.” Some regions like Calgary and Edmonton would continue to reel under the combined effects of COVID-19 and the sharp drop in crude oil prices. Real GDPs of these two areas are expected to shrink in 2020 with any form of sharp resurgence expected only in 2021. RBC believes that the volatility in the overall Canadian housing market should be contained in the latter half of the year.

Vancouver and Toronto

Not all regions are expected to have a slow recovery in the second half of 2020. Greater Vancouver and Greater Toronto are two markets that have been deeply impacted by the lockdown in terms of volume of home sales. Not surprising, as those two markets are overvalued by many metrics and have been on the top of warning lists from global economists, not just domestically.

Vancouver and Toronto are the largest and most expensive segments in the Canadian housing market, and they saw a decline in the month on month transactions of 54.8% and 64.4%, respectively. This has not been accompanied by a drastic drop in price yet, however. Vancouver saw a year on year drop of only 2.6% while the prices appreciated in Toronto by 10.2%.

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