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Canadian home prices expected to keep rising this year, outpacing inflation
Poll of property market analysts finds prices expected to rise 5% this year
Authors of the article:
Mumal Rathore and Richa Rebello
The Canadian housing market has showed resilience, helped by record low mortgage rates and massive fiscal spending.
BENGALURU Canadian house prices will continue their upwards march this year, outpacing inflation after hitting record highs in 2020, according to a Reuters poll of property market analysts who said the risk of a COVID-19 resurgence derailing activity was low.
Renewed lockdown restrictions after a second wave of infections hit the country are threatening expectations for a strong recovery after the economy likely posted its biggest GDP drop on record of 5.1 per cent in 2020.
Yet the Canadian housing market showed resilience, helped by record low mortgage rates and massive fiscal spending.
The Jan. 12-29 poll of 15 property market analysts showed house prices would rise 5 per cent on average this year nationally. That was the highest prediction since Reuters began polling for 2021 in February 2019.
Prices were expected to jump 4 per cent further next year compared to 3 per cent forecast in September. Both 2021 and 2022 predictions are significantly higher than inflation expectations.
Historically low interest rates, changing housing needs, high household savings and improving consumer confidence will keep demand (for homes) supercharged, said Robert Hogue, senior economist at RBC.
The main restraining factors will be a lack of supply, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.
The Bank of Canada was predicted to keep its key interest rate unchanged at near-zero levels until at least 2024, according to a separate Reuters poll.
House prices in Toronto and Vancouver were expected to rise 5.3 per cent and 4.1 per cent this year respectively, up from 2 per cent predicted for both in September.
Apart from easy monetary policy, a desire for more living space and a successful vaccine rollout were identified as the potential drivers of Canadian housing market activity this year, the poll showed.
While prices are set to rise again this year, nine of 14 economists who answered an additional question on whether activity would be faster or slower than in 2020 said it was likely to be slower over the coming year.
But most economists who responded to another question said the risk of a resurgence in COVID-19 cases derailing the housing market this year was low.
Fading income support, expiring mortgage deferrals and rising interest rates would strongly suggest that the housing market will downshift over the course of 2021, said Brendan LaCerda, senior economist at Moodys Analytics.
Housing is at risk, but not from COVID-19.
Affordability remains a concern. When asked to assess house prices on a scale of 1 to 10, where 1 is cheap and 10 is expensive, respondents rated national, Toronto and Vancouver at 7, 8 and 9, respectively.
Lower interest rates have improved affordability despite the increase in prices. However, that only implies homes are cheap conditional on rates. Rising rates in 2021 will strain affordability, said LaCerda.
Scotiabank: Why Canada needs to focus on ways to encourage more home building
The recent run-up in housing prices, and the attendant worries about affordability and accessibility, have many stakeholders scrambling to find quick solutions. While understandable, those approaches are likely to have only minimal impacts on Canadas housing situation and its consequences for people looking for a reasonably priced place to live. Focusing on interest rate policy or macroprudential instruments, such as stricter mortgage stress tests, draws attention away from the underlying cause of the problem: the inability of supply to meet demand. Put simply, this country doesnt build enough housing. We should not be surprised by this. Canada has increased immigration dramatically in recent years to tremendous benefit to the economy, but we failed to pro-actively address the housing challenges the consequent population boom was sure to bring. Policy efforts must focus far more on anticipatory, collaborative, multistakeholder and very specific solutions to the housing situation rather than on the short-term and ultimately ineffective macroprudential Band-Aids applied in recent years. Scotiabank Economics is publishing research this week looking at the increase in Canadas housing stock relative to the increase in population over the past several years to get a sense of how effective we have been in creating new units. The numbers are not encouraging. One way to look at it is by using the ratio of new housing to population growth. By that measure, construction has been well below its historical average since mid-2017. That is perhaps not surprising, given that Canada has seen an immigration-fuelled population boom since 2015. In the three years leading up to the COVID-19 pandemic, population grew nearly twice as fast as new housing units were being built. That ratio improved somewhat with the COVID-related stall in immigration, but it is likely to reverse course once immigration returns to planned levels.
Dan Rees is group head, Canadian banking at the Bank of Nova Scotia. Jean-Franois Perrault is Scotiabanks chief economist
Two-thirds of Canadians were asset resilient in the year prior to the pandemic
Just over two-thirds (67.1%) of Canadians were asset resilient for at least three months in 2019, up from 63.6% in 1999.
Over these two decades, several factors contributed to the overall rate of asset resilience. For one thing, Canadians held more liquid assets at the end of the period. Median person-adjusted household liquid assets rose from $6,300 in 1999 to $10,700 in 2019. Canadians were also slightly older, on averagethe median age of Canadians increased from 36.4 years to 40.8 years. Family income has also been rising since 1999, and asset resilience is associated with higher income. The median person-adjusted, household after-tax income of Canadians increased by one-third (+34.9%), rising from $37,300 in 1999 to $50,300 in 2019, while the share of Canadians below the LIM-AT edged down from 12.4% to 12.1%.