Housing markets in Canada continue to defy gravity and the pandemic

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Millicent Wong
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  1. Property

The prognoses of a real estate crisis have been greatly exaggerated, if not wrong

Author of the article:

Murtaza Haider and Stephen Moranis, Special to Financial Post

Publication date:

Dec 16, 2021 • December 16, 2021 • 4 minutes read • 26 comments A house for sale in Toronto.A house for sale in Toronto. Photo by Carlos Osorio / Reuters

The year is not over yet, but home sales in Canada have already surpassed total sales for 2020, proving once again that projections of a housing crisis are grossly exaggerated, if not incorrect.

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By the end of November, 630,634 residential properties had already been closed, beating the previous record of 552,423 sales in 2020, according to data from the Canadian Real Estate Association (CREA).

A price increase went hand in hand with increasing sales. The quality and size-adjusted CREA property price index recorded an increase of 25.3 percent in November compared to the previous year. In smaller cities near populous metropolitan areas, prices rose much faster. For example, the real estate price index in the greater Vancouver area rose 16 percent year-over-year, while prices in Fraser Valley rose 30.3 percent.

At the start of the pandemic in 2020, many housing market projections drew downfall and tribulation by forecasting a decline in sales and prices. But the opposite has happened, and record sales and prices are an integral part of most regional housing markets.

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In order to predict the future, one must first predict the past, or at least figure out why the dire housing market forecasts have proven so drastically wrong. Some explanations are easy to see. First, governments around the world decided not to let the pandemic destroy the economy and responded with unprecedented incentives by pouring trillions of dollars into the economy collectively. Canada was no exception. Income support programs as well as mortgage and rent relief in the early stages of the pandemic supported the residential real estate sector.

The extremely low mortgage rates made monthly mortgage payments very affordable, even with real estate prices rising. As a result, new homebuyers poured in and existing homeowners traded.

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Smart forecasters would have correctly anticipated the impact quantitative easing and lower interest rates would have on the housing markets. In fact, some market watchers were quick to warn that such moves would push the Canadian real estate market towards steroids. What others have overlooked is how the pandemic has transformed residential property valuation models – a previously poorly understood phenomenon.

COVID-19 has drastically increased the demand for residential property and thereby increased the intrinsic value of home office (WFH) living. Living today is an extension of the workplace, the last step on the last mile of online retail, a meeting place for leisure and at times a classroom for the children.

Simply put, living means a lot more now than it used to be, so prices only reflect the greater importance of living in pandemic-infected markets.

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Hence, higher sales and higher prices are essentially a consequence of the imbalance in housing demand and supply. In November, the SNL ratio of sales to new listings was 77 percent. Although this was slightly below the 79 percent from October, which indicates a slight decline in demand in relation to supply, it was still well above the long-term average of 54.9 percent.

What can we expect in 2022? First, let’s take a look at the market fundamentals. Many potential buyers who failed to outbid others in 2021 will be back in the market next year. In addition, housing demand will receive an additional boost as immigration flows are expected to resume and the economy shows stronger signs of recovery.

Interest rates are expected to rise, but their impact on house prices is likely to be modest. Barring a major policy change resulting in tighter lending standards, the likely scenario for 2022 is a spike in house prices, with demand continuing to outstrip supply. Royal LePage has already forecast that property prices will “rise sharply again in 2022, but more slowly than 2021”.

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During a health and economic downturn, the strength and resilience of the Canadian real estate markets should have been a welcome sign. Still, for understandable reasons, many are dismayed by the rapid rise in property prices over the past 20 months. The discrepancy between income and property prices is causing great resentment among thousands of families.

However, the counterfactual scenario of falling home prices and sales during the pandemic could have made Canadians, most of whom are homeowners, even tougher, and housing is their largest investment and channel of choice for savings.

Improving home ownership prospects for low and middle income households should be the goal of future government intervention. However, this shouldn’t require a sharp drop in house prices that would put most Canadians at a disadvantage.

Financial items

Murtaza Haider is Professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached on the website of the Haider-Moranis Bulletin www.hmbulletin.com.

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