What Canada’s housing market will look like in the post-COVID-19 world (it’s not all good news)
Social distancing has frozen Canada’s housing market. Sales and new listings in Toronto were down 69% and 64% in April, respectively, from the year before. Anyone selling right now probably has to, so any data economists can glean will be misleading.
To find out where we are truly headed, CIBC economists looked beyond today’s distorted numbers to see what the economy and the market will look like when we are on the other side of this pandemic.
The good news is the housing market started in this crisis on a solid footing. There were signs the market was improving after adjusting to the stress test. National average home prices were seeing double digit increases, and sales were climbing.
The not so good news is what happens to the economy once it does start to reopen. “Our working assumption is that a flattening of the virus curve will not be a green light to go back to normal,” wrote CIBC economists Benjamin Tal and Katherine Judge in a report this morning.
“Simply put, reopening stores and restaurants does not mean that people will feel comfortable shopping and dining out again,” they said. There is also the risk that a second wave of infection will bring back social distancing rules, delivering another blow to a fragile economy.
CIBC expects volatile growth to continue until there is a vaccine.
“The economy of the post-vaccine era will be a different economy. The cumulative damage suggests that when we recover, potentially at one point in 2021, we will be recovering into recessionary conditions.”
Unemployment is now rising from a pre-crisis rate of 5.5% to above 13%. Most of that is temporary layoffs and people will go back to work when the economy opens. “But no doubt, a portion of the damage we are witnessing now will be long lasting, as many small businesses will close permanently, and some larger corporations will reduce capacity. So, the move from 5.5% to 8% in 2021 is in line with a recessionary economic environment.”
The housing market will not be spared the volatility, CIBC says. When the market returns to fundamentals in 2021, CIBC expects demand will be reduced by a weaker labour market and less investment activity.
“Overall, as the fog clears, we expect to see average prices 5-10% lower relative to 2019 levels, with high cost units in the high-rise segment of the market seeing the most notable price declines,” they said.
Home construction will also suffer. This was supposed to a record year for completions, but that’s not going to happen now. Homebuilders face shortages of workers and materials, while social distancing is slowing the speed of work. CIBC estimates productivity is down about 40% based on conversations with developers.
“Even during deep and painful previous recessions, housing starts in Canada didn’t fall below an annual rate of 100,000 units. This time around, they will break that barrier,” said the economists.