Canada’s housing market has experienced a V-shaped recovery during the pandemic, but the strong bounceback likely isn’t sustainable over the longer term.
Last month, CIBC Economics described housing’s recovery as “mind boggling” considering the recession.
“The level of real economic activity is still an estimated 4.7% below its pre-recession reading, and the labour market is still miles below its pre-crisis level,” the report said.
“But home sales are rising by north of 30% on a year-over-year basis.”
That robust performance continues. October housing data, released on Monday, showed that sales activity increased 32% year over year (not seasonally adjusted) — a record for that month, though down from September’s record high of more than 45%. (Seasonally adjusted, October home sales were down 0.7% compared to September.)
The average home price rose more than 15% year over year in the month to a record $607,250.
Housing’s strength during the pandemic extends beyond the typical hot spots, said Katherine Judge, economist at CIBC World Markets, in an Oct. 23 interview.
“It’s not simply explained by activity in the expensive markets like Toronto and Vancouver,” Judge said. “It’s very widespread.”
In October for the fourth straight month, sales activity was up in almost all Canadian markets compared to the same month in 2019.
Pent-up demand following the economic shutdowns explains some of housing’s strength. The sales-to-new-listings ratio in September (77.2%) was only slightly below a record high reached in 2002; the measure eased in October (74.3%) but remained among the highest levels on record.
With elevated demand, “we’re looking at very tight inventories in the housing market,” Judge said.
Demand for single-family homes has been particularly strong, while supply has been constrained. “Starts of single-family homes have lagged multifamily,” Judge said.
The housing market’s impressive performance also reflects the resilience of higher-paying jobs during the pandemic.
“When you look at the asymmetric nature of the recession, which is something that we’re seeing in the job market, about 80% of jobs lost have been in low-paying industries,” Judge said.
Given that the economy isn’t expected to fully recover from Covid-19 until 2022, she said, the housing market is set to face a more challenging environment ahead.
“We do not see the current trajectory of the housing market as being sustainable,” Judge said, as the second wave of Covid-19 will negatively impact consumer confidence and job security.
“That could be across all sectors,” she said, “not just the lower-paying industries but also the higher-paying.”
As a result, home sales are expected to stabilize at a level below their long-term potential. Judge also noted that annualized home price inflation could be negative in the months ahead.
What’s not expected to be reflected in the economy or housing market are mortgage deferrals during the pandemic.
“A lot of them were actually relatively high-quality in terms of credit scores and were actually done more as precautionary measures,” Judge said.
While weaker housing demand is expected to emerge, single-family homes could continue to outperform condos given supply-side challenges for single units and the pandemic’s lesser impact, at least initially, on higher-paying jobs.
Further, demand for condos is relatively soft due to elevated supply, as increases in the pace of housing starts are largely attributable to multi-unit segments.
“Certainly, exercising some caution when allocating your client’s portfolio to real estate is warranted,” Judge said.
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