Housing’s sizzle is set to fizzle

The housing market is hitting new highs this year, demonstrating a resilience that’s unparalleled during an economic downturn, and thus motivating investors to take a closer look at the market.

Listen to the full podcast on AdvisorToGo, powered by CIBC.

In October (the most recent month for which data are available), home sales across the country increased 32% year over year (not seasonally adjusted) — a record for the month. The average home price (not seasonally adjusted) also set a record, increasing more than 15% year over year to $607,250.

“This is by far the most housing market–friendly recession in Canadian history,” said Benjamin Tal, managing director and deputy chief economist at CIBC, in a recent interview.

Tal analyzed housing data and recessions, finding that the current recession has been “much gentler” on housing than any previous one.

For example, the decline in home sales per 1% drop in GDP was about 4% during the 2008 recession, and about 7% during the 1991 recession. During Covid-19, that figure has been minimal — about 0.25%.

While low interest rates, as well as pent-up demand, help explain some of housing’s strength, they don’t tell the whole story, Tal said.

Interest rates are lower in absolute terms relative to other recessions, but, with the stress test, today’s new homebuyer must currently qualify for a mortgage at 4.79% (five-year fixed or variable), Tal said. That compares to 4.0% for a fixed-rate and 3.0% for a variable-rate mortgage in 2008.

More than low rates, the asymmetrical nature of the pandemic recession helps explain housing strength: 90% of jobs lost during the pandemic were low-wage ones, Tal said.

“You have a very large segment of the population that were not touched by this recession financially,” he said. With intact incomes and falling interest rates, these consumers capitalized on an opportunity, he said.

He also noted that housing type is a factor in the housing market’s recovery, with more buyers moving to more expensive, larger units (detached housing). This shift accounts for 60% to 70% of the increase in home price inflation, Tal said.

Housing strength exhibited during Covid-19 isn’t expected to persist in the coming months.

“We are going to see some softening in the labour market as the economy softens during the cold days of winter,” Tal said.

As a result, housing’s number one casualty will likely be condos. In that space, “we see a lot of … supply coming and reduced demand by investors and homebuyers,” Tal said.

The hit to condos will likely occur over the next six to seven months. “Beyond that, as the economy starts improving in the second half of 2021, I see the housing market recovering very strongly,” he said, eventually returning to its pre-pandemic state.

“In 2022, 2023, you will see the housing market going back to where it was in 2019,” Tal said. “The fundamentals of the housing market haven’t changed.”

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.