Canadian home prices could fall 7% in 2021, Moody’s predicts

Home prices across Canada could see a 7% decline next year as a result of contracted economic activity due to the Covid-19 pandemic, according to the latest forecast by Moody's Analytics Inc.  

The credit rating agency predicts the economic recovery will lose momentum through the first half of 2021 as government stimulus measures, such as mortgage deferrals and low interest rates, fade. High unemployment and lower incomes will restrain buyers’ return to the market. Slower immigration flows due to the pandemic disruption will also weigh on housing demand.

“The housing market will no longer be able to escape the poor condition of the labour market as vacancy and delinquency rates rise in 2021,” Moody’s Analytics economist Abhilasha Singh wrote in her report. “Not even lower interest rates will be enough to save the housing market.”  

Singh says the speed of the drop will vary considerably across provinces. While all regions will experience price drops, the Prairie provinces are the most vulnerable and will register the most sizable peak-to-trough decline.

Moody’s says house prices in Calgary and Edmonton face the slowest recovery due to uncertainty in the energy sector. New single-family homes in these two cities show “dangerous signs of excess supply”, and the share of first mortgages in arrears is much higher in the Prairies than the rest of Canada. Housing starts are almost one-third below their levels a year ago, mainly due to elevated inventories of unsold new units in Alberta.  

In stark contrast to the Prairies, Ontario’s housing market is tight. Home sales jumped 40% in August compared to the same month last year, according to the August resale housing report from the Toronto Regional Real Estate Board (TRREB). The number of new and active listings in TRREB’s Multiple Listing Service System in August also went up on a year-over-year basis.

“Competition between buyers was especially strong for low-rise home types, leading to robust annual rates of price growth,” Jason Mercer, TRREB’s chief market analyst, said in a statement. “However, with growth in condominium apartment listings well-outstripping condo sales growth, condo market conditions were comparatively more balanced, which was reflected in a slower pace of price growth in that segment,” he adds.

Canada Mortgage and Housing Corporation’s (CMHC) Housing Market Assessment for the third quarter echoes Moody’s forecast. Weakening housing market fundamentals and an increase in average overvaluation estimates in the first and second quarters of this year have led to a moderate degree of vulnerability in Canada’s housing market.

“Housing market activity across the country slowed significantly between the first and second quarters of 2020 due to the effects of COVID-19,” says CMHC’s chief economist Bob Dugan. “However, the sharp pullback in new listings and resulting low levels of inventory maintained some pressure on observed house prices in the local housing markets that were seeing strong activity prior to the crisis.”

The pandemic will continue to cast a pall over Canada’s real estate market. Prime Minister Justin Trudeau recently announced that the second wave of Covid-19 infections is already underway in Canada’s four biggest provinces — British Columbia, Alberta, Ontario, and Quebec.

As of September 28, the total number of Coronavirus cases in Canada exceeded 155,000, and Ontario reported a single-day record of 700 new COVID-19 cases since January. Ontario Premier Doug Ford calls the record setting number “deeply concerning.”

“We are in the second wave. And we know that it will be worse than the first wave. But what we don’t know yet is how bad the second wave will be,” Ford said from Queen’s Park in Toronto. “Our collective action will decide if we face a wave or a tsunami.”

The Covid-19 situation in some provinces seem to lend credence to the concern raised in Moody’s report that the impending arrival of colder seasons and a return to indoor activities will trigger a renewed wave of Covid-19 that could spur a greater than expected decline in house prices.

Moody’s expects housing prices to start recovering in early 2022, but the development and broad deployment of a vaccine is the “greatest wild card” in the forecast.

“If a vaccine is delayed, then so too is the timing of the recovery, the report says.

Jean Lian is Head of Communications and Brand Marketing with HomeLife Realty Services Inc. in Toronto. Contact Jean at marketinghomelife@gmail.com.