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Katherine Judge, economist at CIBC Capital Markets

We’ve generally been very surprised by the strength in the housing market during the recovery. It’s been a V-shaped recovery, while the labour market in comparison is still very far from fully recovered. We’re seeing average home prices rising by almost 20% year over year. When you look into the details, it’s not simply explained by activity in the expensive markets like Toronto and Vancouver. It’s very widespread.

And if you look across all of the metrics — sales, new listings and average prices — they’re all now above pre-pandemic levels. The sales-to-new-listings ratio is only a few ticks below a record high, so we’re looking at very tight inventories in the housing market. Now, the question is, is this activity sustainable when we’re not expecting a full recovery in the economy until 2022?

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. So a lot of the demand we’re seeing, some of it is pent up demand, but a lot of it simply reflects the fact that higher-paying jobs have largely remained intact during this recession.

Demand for single-family homes is certainly elevated and when you look at the supply side of the equation, it’s somewhat constrained. Starts of single-family homes have lagged multifamily. And then there’s a lot of multifamily supply coming onto the market at a time when demand has been damaged. And we’re also seeing a lot of short-term rentals converted into longer-term rentals, adding more supply into the market.

Now, since we are entering the second wave of the virus and we do see slower economic growth ahead, we do not see the current trajectory of the housing market as being sustainable. As we continue in the second wave, we do see negative impacts for confidence, as well as job security concerns, and that could actually be across all sectors, not just the lower-paying industries, but also the higher-paying industries. So, we actually do think that we could see weaker demand in the single-family market ahead as well.

It’s conceivable that home price inflation on an annual basis could dip into negative territory in the months ahead. We do still expect the single-family market to outperform condos, given the difference in the supply side of the equation and also the initial impact, which was concentrated in lower-paying sectors.

If you think about condos as an investment vehicle, we are seeing softer demand due to elevated supply and still elevated construction in terms of what’s in the pipeline. So, certainly exercising some caution when allocating your client’s portfolio to real estate is warranted.

When we look at mortgage deferrals, because a lot of them were actually relatively high-quality in terms of credit scores and were actually done more as precautionary measures, we actually do not see any macro impact from the end of mortgage deferrals on the economy or the housing market.

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