Has the COVID-19 pandemic changed the housing market forever?

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of  the authors’ employer, organization, committee or other groups.

Acknowledgement: I would like to express my great appreciation to Viktoria Halim for her helpful contribution towards the development of this article.

Overview of the housing market in Canada

The housing market in Canada is crucial to the Canadian economy. As a stable investment, Canadians purchase homes and have the opportunity for lower down payments through the Canada Mortgage Housing Corporation’s (CMHC) insurance via a number of requirements. Home ownership is an important aspect of a Canadian’s financial success. In Canada, the share of income a household would need to cover ownership costs is 51% while in cities like Vancouver it is at 79% and Toronto is at 69% (RBC Economics). This presents limited options for Canadians living in these provinces. 

The housing market in Canada was doing fairly well up until the end of 2019. There were discussions around a potential uptick and for sales and housing starts to rise into 2020. However, with the recent COVID-19 crisis, the outlooks have now been forecasted to change, developing a new trajectory for the housing market. Nevertheless, the housing market is expected to rebound by the end of 2020/early 2021 and get back to its original pre-COVID-19 trajectory, according to some economists.

Impact of COVID-19 on home prices, sales and housing starts 

Similar to the stock market, there seems to be a disconnect between the realities of the economy and the housing market. While some think that the COVID-19 pandemic will lead to a historic recession in 2020 with significant falls in indicators of the housing market and prices not returning to their original trajectories for another two years, the realities of the housing market have been different.

Before COVID-19 was declared a pandemic by the World Health Organization, the spring real estate market was set for a record-breaking sales season. The Canadian Real Estate Association revealed the month of February was particularly hot for year-over-year sales, which rose 27% nationwide, indicating the busy spring buying season had started early. Similar performance was recorded for Toronto and Vancouver homes for sale; transactions rose 45.6% and 44.9% year over year in those cities, respectively. While we may expect a buyer-seller stalemate, the last time the Ontario real estate market witnessed such a situation was in the spring of 2017, when the former provincial government introduced the Fair Housing Plan, a package of measures that included a foreign buyers’ tax for the Greater Toronto Area, and new rent controls. While the measures themselves didn’t hinder buyers’ financial capacity, they caused a “psychological” cooldown in the market. 

Ottawa’s real estate market was experiencing a profound boom prior to the COVID-19 pandemic as well. By January 2020, the prices of average residential houses had increased by 19.3% from last year to $516,229 and condos by 19.1% to a $338,000 average selling price (Ottawa Real Estate Board, 2020). The Royal LePage House Price Survey also found that the aggregate price of a home in Ottawa crossed the $500,000 milestone for the first time.

The impact of the pandemic on Ottawa’s real estate market as well as other markets across the country seems to be increasing home prices as most home resellers have also decided to put a hold on selling their homes while new home builders have seen a decline in their activities as a result of increased restrictions from the city. Therefore there are fewer houses being sold with demand remaining the same. This situation is likely to change as provinces continue loosening their restrictions. The Bank of Canada has also reduced the interest rate, improving liquidity and pumping unprecedented amounts of money into different sectors; which may cause inflation and the reduced interest rate may make home buying more attractive. With the high volatility of the stocks, investors might look to keep their cash safe in residential real estate and as Ottawa is such a real estate investment hotbed, it is likely that real estate demand will remain healthy in Ottawa. However, Ottawa Business Journal wrote that CMHC is forecasting that Ottawa’s real estate market could soften over the coming year with home prices dropping in 2021 and then rising up again in the following year. In oil-dependent Alberta, on the other hand, prices are forecast to go down by as much as 25 per cent, according to another article. This is not surprising since oil dependent cities have recently experienced a decline in the housing market due to a fall in oil prices which was further worsened during the COVID-19 pandemic as oil prices fell below zero. CMHC’s latest Housing Market Outlook is also expecting the negative impacts of lower oil prices to cause additional pressure on the housing markets in Alberta and Saskatchewan.

Another interesting recent development in the housing industry due to the COVID-19 pandemic is CMHC’s policy to tighten its underwriting efforts. Many think the timing is wrong given that now more than ever policies should be geared at increasing economic activity. CMHC CEO Evan Siddall said “COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians. These actions will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth”. Interestingly, other mortgage insurance providers (Canada Guaranty and Genworth Canada) have decided not to follow suit and will not be changing their underwriting policies, which may result in a changing market share of insured mortgages in Canada, according to Toronto Storeys.

Technology impact of COVID-19

There is no doubt that COVID-19 has accelerated the pace and in some cases jump started digital transformations across industries and the real estate market is no exemption. Who would have imagined a world where sellers quickly innovated to keep their businesses running and buyers continue to find, inspect and close homes in a lockdown economy. According to Canadian Mortgage Trends, four out of 10 Ontario homeowners said they were “open” or “somewhat open” to buying a home virtually. As with many other trends, it is no surprise that younger people are most likely to embrace this new virtual reality.

Some other interesting trends in the housing market that we have observed include: Platforms for consolidated rate search such as Lendesk’s Spotlight Search, drones for online real time or recorded viewings as well as aerial photographs, immersive technologies such as virtual reality for home walkthroughs and personalized home staging, teleworking, online closing, virtual appraisals, e-signatures and cloud-based document sharing, increased social media engagement and other virtual marketing strategies. 

As with any technological upgrades, in this new digital era, security will continue to be a major challenge, therefore organizations will need to enhance their security measures in order to protect their customers. Realtors and mortgage agents must continue to be trained and retrained on data privacy and security.

What’s next? 

The COVID-19 pandemic has brought on a number of uncertainties in the housing market. Many economists are now fully revising their forecasts and saying that they are still unsure if they can consider their forecasts as accurate. 

In Q2 of 2020, RBC Economics (2020) forecasted home resales to fall between 2019 and 2020 in Canada (-19.8%), Ontario (-19.4%), Quebec (-20.3%), British Columbia (-17.5%), and Alberta (-24.2%). However, all of these home resales are forecast to rise back up again in 2021, indicating that the pandemic will have a strong but short-lived impact on the Canadian housing market. Housing starts are another important indicator of the health of the housing industry. Due to the halt on some construction projects around the country, housing starts were much softer in Q2 2020 than expected. At this time, Scotiabank (2020) is forecasting housing starts to decline from the 209,000 units level in 2019 to 145,000 units in 2020 (a 31% drop year-over-year). However, Scotiabank (2020) is also expecting housing starts to rise up again in 2021, back to 191,000 units.

The latest Housing Market Outlook by CMHC is forecasting even larger declines for housing starts - between 51% and 75% in the second half of 2020 from pre-COVID-19 levels. Home prices, on the other hand, are expected to dip as well but recover in 2021, according to the report.

A number of organizations are providing forecasts for housing starts, prices and re-sales with a variety of different ranges. It will be interesting to see where the housing market will end up by the end of 2020 and the beginning of 2021. As mentioned above, the COVID-19 pandemic has brought on a number of uncertainties and many organizations are struggling to understand the material impact the pandemic will have on the housing market this year and in the years to come. It will be interesting to see how the housing market will continue to evolve, leveraging technology to attract new buyers and sellers. 

What do you think about the current and future prospects of the Canadian housing market? We welcome and encourage readers to continue the dialogue in the comments below or to reach out to the authors directly.