The downturn in Canada’s formerly hot housing market likely has longer to run, says CIBC’s deputy chief economist. But it’s not necessarily a bad thing.
“It’s not a crash by any stretch of the imagination. It’s simply reallocation of activity over time,” said CIBC’s Benjamin Tal in a recent interview.
Home sales were down 36% in October compared to a year ago, signalling the slowdown that materialized earlier this year will stretch on. The average price for a home was down almost 10%.
However, Tal said this is a “very healthy situation.”
During the pandemic, the majority of jobs lost were low-paying positions often held by renters, which is why rent prices declined. On the other hand, he said potential homebuyers were flush with cash and benefited from low interest rates without the cost of a recession.
Subsequently, Tal said, home sales spiked, up 46% at their peak from before the pandemic.
“We basically borrowed activity from the future because interest rates were so low,” said Tal.
Now the future has arrived and the market is correcting: “You cannot have this kind of shock without a correction, so whatever we see now in the housing market is very healthy.”
That said, there is a difference between the current market correction and previous cycles, namely the availability of supply. Tal said there is no panic in the housing market because there are no major issues in the labour market — at least not yet.
The decline in prices is due to a lack of demand, he said, but because supply is also down, the declines haven’t been as extreme.
However, Tal said an overshoot by the Bank of Canada could lead to a more significant recession. In that case, an uptick in unemployment could mean an increase in supply, and the market could experience further declines.
On the flip side, Tal said the lack of supply could continue into next year because higher construction costs have stopped builders from building. In the Toronto area, Tal estimates one-third of projects have been cancelled or delayed. So when the fog clears and the market has stabilized, he said the supply won’t be there.
Therefore, Tal said the correction the market is currently seeing is not the beginning of a long-term decline, given the market’s strong fundamentals.
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