Why is real estate soaring in the pandemic?

By Mark Burgess | December 1, 2021 | Last updated on November 29, 2023
3 min read

Canada’s real estate market has been “the champion of the Covid recession,” defying the downturn with prices rising more than 20% across the country, CIBC’s deputy chief economist says. The question is: Why?

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Benjamin Tal points to the pandemic’s asymmetrical economic impact. Most of the jobs lost last year were in low-paying professions and disproportionately affected younger people — in short, renters.

While rental prices dropped in the pandemic’s first year, those whose jobs were more adaptable to remote work were unaffected.

This created a highly unusual situation, Tal said in an interview last month. Typically in a recession, lower interest rates are balanced out by reduced job security, so fewer people are able to take advantage of cheap borrowing.

“What happened here is that potential home buyers got the benefit of a recession, vis-a-vis extremely low interest rates, without the cost of a recession, vis-a-vis a broadly based increase in the unemployment rate,” Tal said.

“They benefited from low interest rates without the cost of being concerned about their job security.”

That resulted in an overheated housing market, Tal said. While the market has stabilized in recent months, monthly sales are still roughly 10,000 units above pre-pandemic levels, he said, and inventories are at record lows.

One contributing factor to sales volume and rising prices is the number of parents willing to help their children with down payments, Tal said: almost one-third of first-time home buyers in Canada now receive a gift, and the same is true for one in 10 buyers moving into a larger home.

“The amount of gifting in the market is something that we haven’t seen before,” he said.

Tal put the phenomenon within the broader context of a massive intergenerational wealth transfer. The effect is most evident in Canada’s priciest housing markets: in Toronto, the average gift for “mover-uppers” is $250,000; in Vancouver, it’s $340,000.

“This family money transfer is a big factor that we cannot ignore, impacting the trajectory of the housing market,” Tal said.

So how will higher interest rates affect the market? Tal said higher rates will probably affect would-be buyers most, resulting in fewer loan originations, which is “actually a good thing because the market has to slow down.”

The impact will be smaller on those renewing mortgages, he said, as many owners are currently paying more than the prevailing rate. Those who took mortgages in 2020 and 2021 are most vulnerable as any increase will feel significant. There could be a knock-on effect to the broader economy as those homeowners’ capacity to spend on other things is reduced.

When it comes to major cities such as Toronto, Vancouver, Montreal and Ottawa, Tal said we’re reaching a “resistance level,” with prices in the low-rise market so high that they’re pushing buyers to condos. High-rise demand is rising as people realize “the city is back,” he said.

The condo market should remain strong barring a policy error, Tal said — namely, raising interest rates too quickly to combat inflation.

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Mark Burgess

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.