Pandemic disrupts the Canadian housing market

Unusual “pandemic economics” present troubling trends on home ownership and housing affordability

The Covid-19 pandemic has disrupted Canada’s housing market in unexpected ways, says a report by RBC Economics.

“In just months, the landscape of Canadian real estate has been shaken to its core,” Robert Hogue, senior economist with RBC Economics, said in his October 29 report.

The pandemic has not only changed the way people work but also where and how they want to live. Housing in rural and suburban areas that once lagged desirable city addresses are now “roaring hot” as homebuyers seek larger living spaces outside the downtown core. Tight downtown condominium markets that previously commanded expensive rents are now thick with supply, and the immigrant flow that typically fuels housing demand of all types has slowed to a trickle, the RBC report says.

A September report on the unusual world of pandemic economics by the British Columbia Real Estate Association (BCREA) says the Covid-19 recession has created strong home prices that are at odds with typical recession dynamics.

“This has not been a typical recession, and many of the trends we are seeing are without precedent,” according to the BCREA report.

The BCREA report points to the serious implications that the recession’s asymmetric impact has on inequality and housing affordability. In past recessions, the BC economy experienced relatively uniform job losses across all sectors, and the impact on low-wage sectors is more muted. But in the Covid-19 recession, the frontline service — particularly the hospitality and restaurant industries — bore the brunt of job losses.

“One thing we know for sure is that pandemic economics are very unusual and in these unprecedented times, history may not be as strong a guide,” the BCREA report says.

Significant uncertainty remains in Canada’s housing market, but Hogue says one thing is certain: “2020 has been a year like no other for Canadian housing markets.”

The RBC report outlined the seven ways the pandemic has upended the real estate market:

1. Peak season for home resale activity shifted from spring to summer

Spring is typically a high season for the housing market. But the lockdown in March sent a shock wave through the housing market as open houses are suspended and home sales flatlined. The high season became pushed forward to summer as social-distancing restrictions relaxed and pent-up demand resulted in record-high activity over the July to September period.

2. The cooling of rental markets in large and least affordable cities

Another unexpected trend is the cooling of rental markets in some of Canada’s high-density, downtown locations such as Toronto, Montreal and Vancouver. In October, the asking rent for one-bedroom apartments fell 11% in Toronto, 9% in Montreal and 8% in Vancouver compared to last year.

The declining demand for the rental market is caused by a confluence of factors. The dissipation of short-term rental business with the halt in tourism and the completion of new, purpose-built rental and condominium units have both created a surge in rental supply.

Other contributing factors include massive job losses that have put many renters under heavy financial pressure and the decrease in the inflow of international students as the housing demand near post-secondary institutions waned and many educational institutions switch to online study.

3. Investors offload condominiums onto the market

As rental prices fall and condominium vacancies and listings in Toronto, Montreal and Vancouver spike, condominium investors are looking to sell their units at a time when newly completed condominiums are bringing more units to the Toronto and Vancouver markets.

Condo listings in the City of Toronto rose a whopping 134% in September compared to the same time last year, while condo listings in the Island of Montreal rose 41%.

4. The urban exodus and the move into cottage country

The pandemic has transformed what were once advantages of big-city living into major risk factors for Covid-19 infection. High-density living in metropoles has lost some of its allure as physical-distancing measures put a lid on social and cultural activities.

The attachment to big cities is further eroded as people who used to work in office towers now work from home, driving up the demand for cottage-country real estate where housing is more affordable and larger living spaces are available.

Below shows the year-to-date annual percentage change in home sales in cottage country in Q3 2020:

Ontario

Quebec

  • Muskoka-Haliburton: 29.6%

  • ​Southern Georgian Bay: 24.2%

  • Orillia: 20%

  • Kawartha Lakes: 15.7%

  • Quinte: 8.6%

  • Sainte- Adele: 85%

  • ​​Sainte-Agathe-des-Monts: 68.2

  • Sainte-Sauveur: 36.3%

  • Mont Tremblant: 29.6%

  • Sherbrooke-Estrie: 14.9%

5. Increase in disposable income and purchasing power

This is probably one of the biggest economic paradoxes presented by the pandemic: Net household disposable income spiked 11% in Canada, increasing purchasing power and making it more affordable to own a home.

The decline in interest rates and generous government income-support programs for households most affected by Covid-19 have made it easier to carry mortgage payments. Overall, Canadian households received more money ($56 billion) from government aid programs such as Canada Emergency Response Benefit and other transfers in the second quarter than they have lost in wages and salaries due to the pandemic ($23 billion).

The BCREA report also points out that the strength of home prices and the impact on household savings rates and disposable income is at odds with typical recession dynamics. The closure of shops due to the lockdown and restrictions on non-essential travel led to an extraordinary increase in Canadian household savings rates, which climbed to a record high of 28.2% in the second quarter of this year, eclipsing the previous record of 21.2% in 1982.

6. Migration to Canada plummets

Immigration is one of the key drivers of housing demand, and COVID-19 has severely disrupted the flow of immigrants moving to Canada.

The number of new permanent residents plummeted 64% in the second quarter of this year, and total net migration collapsed 94%. Although weak in-migration has had minimal impact on Canada’s overall housing market to date, this trend — if sustained over a longer tern — can temper condominium rental demand since immigrants tend to rent in their first five to 10 years after landing in Canada and could potentially deplete future cohorts of first-time homebuyers.

Hogue’s report forecast that immigration is unlikely to rebound soon as the border remains closed to all but essential travelers and most post-secondary students continue to study at home until immunization from COVID-19 reaches high levels in Canada and abroad.

7. Pandemic puts homeowners on the defensive

The economic shock of COVID-19 has put many Canadians on the defensive with nearly 780,000 people opting to defer mortgage payments since the start of the pandemic, representing 16% of mortgages in bank portfolios. Most mortgage holders whose deferral period has expired had resumed regular payments by the end of August, but it remains to be seen how many will continue mortgage payments.

The “outlook for jobs remains bleak for many Canadians,” Hogue said. “This poses a risk for the housing market, especially in areas where the economy is shakiest. Financial strains could potentially unleash a wave of properties for sale.”

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