Show Transcript
After coming to a near shutdown during mid-March and April, housing activity has come roaring back, as both buyers and sellers have jumped back into the market. Anthony Okolie speaks with Rishi Sondhi, Economist, TD Bank Group, about the outlook for Canada’s real estate markets.
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- Rishi, in your recent report you said the Canadian market is coming back with sales up-- I had to read this twice-- 230% through August. Now, that's despite the weak economy and high unemployment rate. So tell us, what's driving the market?
- Sure, well, there's several factors that are driving the uptick in sales that we've seen. One of them is pent-up demand. So you got to remember that there was a lack of the typical busy spring selling season because of the COVID-19 pandemic. So there was a lot of demand that was built up then that was sort of unleashed in the summer. So that's one factor.
Another factor is that interest rates are at rock-bottom lows, as that's stimulating the market. Yet another factor is the job loss skew. So you'd mentioned that the pandemic had resulted in record job losses and high unemployment and the like. However, the type of jobs being lost matters. So the job loss skew that we've seen so far has really been pushed towards or skewed towards younger individuals in lower wage jobs. And these people don't tend to be homeowners, nor do they tend to be in the market for ownership housing. So even though there's been historic job losses, it really hasn't impacted ownership housing demand that much. So that's yet another factor.
Another factor is the fact that supply has come back at relatively the same rate as demand. And that's important, because you can't buy something that's not listed. And finally, in July and August, that's typically when people go vacationing. However, because of the pandemic, that didn't happen so much this time around. So it give people more of an opportunity to buy and sell during months when they typically wouldn't do so. So there's a ton of factors that explain the surge in sales that we've been seeing.
- What's happened with housing prices as well? Are you seeing any trends there?
- Sure. So housing prices have come back from their April pandemic depths. They've come back quite robustly, in fact. So much so that September was a record month for Canadian average home prices. So it's been a pretty rapid turnaround in home prices. Not only nationally. When you look provincially, six of 10 provinces have home prices that are growing at double-digit year-on-year rates. And all home prices are showing positive year-on-year growth. So it's a very much a broad-based story of robust price growth across Canada.
Now, what explains that, you might ask? Well, now, first of all, as I mentioned, demand has come back. So sales have risen. But beyond that, markets are quite tight. So from a supply and demand perspective, we have tight conditions pretty much across the country. So that's fueling prices. And the third factor is what's being bought. So during the course of the pandemic, there's been more detached home sales than there had been sales of condos. And detached homes tend to be more expensive, and so that would boost average prices, simply through the composition of what's being sold.
- I want to touch on that-- about people sort of looking for detached homes. Because, certainly, have housing preferences really changed during the pandemic? Specifically, are buyers looking for more square footage in a home?
- I would say so, yeah. I mean, the data sort of indicates that. When you sort of break down home sales by detached versus condos and you look at it across major jurisdictions in the country-- not just Toronto, not just Vancouver, but Montreal, Fraser Valley, Edmonton, Ottawa-- you see sort of a pretty clear trend in that detached housing or detached home sales are outperforming condos.
And that could be because people are trying to escape the density and COVID-19 risk of condos. Maybe they don't want to travel in elevators. Or whatever the case may be. Also, condos tend to be in more densely populated jurisdictions where COVID-19 cases are relatively high as is. There also could be sort of a work-from-home component of it as well. A lot of these homeowners are working from home-- myself and, presumably, yourself included-- so that provides another sort of reason to trade up into something a little bit bigger.
- And what about the resale market? What's your forecast there in the coming quarters?
- Well, as strong as the third quarter was, we think that there's some room for it to come off a little bit. You had to remember, in the third quarter, sales were up about 100% quarter-on-quarter, which is an absolutely unprecedented increase. There was a record level of sales, so much so that sales were 20% higher than the prior record level. So it was just an absolutely gangbusters quarter. So it's really hard to repeat that type of success-- I'll call it-- In subsequent quarters.
We think sales activity will cool a little bit in the fourth quarter. And into 2021, we think that fundamental factors will play a role in keeping sales kind of subdued. So one of them being slower population growth brought on by the pandemic. Another being our forecast or our thought that government bond yields may grind slightly higher from their record lows right now. And that could put some upward pressure on interest rates as well.
And finally, affordability in key markets such as Toronto and even in Quebec is quite strained, so it's getting a little difficult to afford houses out there.
- And we just have a few seconds left. But I want to ask you about mortgage deferral program. Now, that's certainly going to end soon. Will that impact your forecast going forward at all?
- Sure. It will. It'll result in some additional supply hitting the market, which will weigh on prices. But it's more likely to weigh on prices rather than upend prices. We don't think that the end of the mortgage deferral program will really cause a widespread price decline. And there's a myriad of factors for that, including the fact that some borrowers who took out these mortgage deferral programs are repaying.
So it suggests that some people took them out of an abundance of caution rather than need. Those who took out the deferrals have relatively high credit scores, so that's a good thing. Markets-- as I mentioned before-- are quite tight. So they can handle some additional supply. And this additional supply might be good for the market in terms of prices. So it can handle some additional supply before we see some sustained downward momentum in prices. So, there's lots of factors that we think will reduce the impact of the end of the mortgage deferral programs.
- Rishi, thank you very much for your time.
- Thanks, Anthony.
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- Sure, well, there's several factors that are driving the uptick in sales that we've seen. One of them is pent-up demand. So you got to remember that there was a lack of the typical busy spring selling season because of the COVID-19 pandemic. So there was a lot of demand that was built up then that was sort of unleashed in the summer. So that's one factor.
Another factor is that interest rates are at rock-bottom lows, as that's stimulating the market. Yet another factor is the job loss skew. So you'd mentioned that the pandemic had resulted in record job losses and high unemployment and the like. However, the type of jobs being lost matters. So the job loss skew that we've seen so far has really been pushed towards or skewed towards younger individuals in lower wage jobs. And these people don't tend to be homeowners, nor do they tend to be in the market for ownership housing. So even though there's been historic job losses, it really hasn't impacted ownership housing demand that much. So that's yet another factor.
Another factor is the fact that supply has come back at relatively the same rate as demand. And that's important, because you can't buy something that's not listed. And finally, in July and August, that's typically when people go vacationing. However, because of the pandemic, that didn't happen so much this time around. So it give people more of an opportunity to buy and sell during months when they typically wouldn't do so. So there's a ton of factors that explain the surge in sales that we've been seeing.
- What's happened with housing prices as well? Are you seeing any trends there?
- Sure. So housing prices have come back from their April pandemic depths. They've come back quite robustly, in fact. So much so that September was a record month for Canadian average home prices. So it's been a pretty rapid turnaround in home prices. Not only nationally. When you look provincially, six of 10 provinces have home prices that are growing at double-digit year-on-year rates. And all home prices are showing positive year-on-year growth. So it's a very much a broad-based story of robust price growth across Canada.
Now, what explains that, you might ask? Well, now, first of all, as I mentioned, demand has come back. So sales have risen. But beyond that, markets are quite tight. So from a supply and demand perspective, we have tight conditions pretty much across the country. So that's fueling prices. And the third factor is what's being bought. So during the course of the pandemic, there's been more detached home sales than there had been sales of condos. And detached homes tend to be more expensive, and so that would boost average prices, simply through the composition of what's being sold.
- I want to touch on that-- about people sort of looking for detached homes. Because, certainly, have housing preferences really changed during the pandemic? Specifically, are buyers looking for more square footage in a home?
- I would say so, yeah. I mean, the data sort of indicates that. When you sort of break down home sales by detached versus condos and you look at it across major jurisdictions in the country-- not just Toronto, not just Vancouver, but Montreal, Fraser Valley, Edmonton, Ottawa-- you see sort of a pretty clear trend in that detached housing or detached home sales are outperforming condos.
And that could be because people are trying to escape the density and COVID-19 risk of condos. Maybe they don't want to travel in elevators. Or whatever the case may be. Also, condos tend to be in more densely populated jurisdictions where COVID-19 cases are relatively high as is. There also could be sort of a work-from-home component of it as well. A lot of these homeowners are working from home-- myself and, presumably, yourself included-- so that provides another sort of reason to trade up into something a little bit bigger.
- And what about the resale market? What's your forecast there in the coming quarters?
- Well, as strong as the third quarter was, we think that there's some room for it to come off a little bit. You had to remember, in the third quarter, sales were up about 100% quarter-on-quarter, which is an absolutely unprecedented increase. There was a record level of sales, so much so that sales were 20% higher than the prior record level. So it was just an absolutely gangbusters quarter. So it's really hard to repeat that type of success-- I'll call it-- In subsequent quarters.
We think sales activity will cool a little bit in the fourth quarter. And into 2021, we think that fundamental factors will play a role in keeping sales kind of subdued. So one of them being slower population growth brought on by the pandemic. Another being our forecast or our thought that government bond yields may grind slightly higher from their record lows right now. And that could put some upward pressure on interest rates as well.
And finally, affordability in key markets such as Toronto and even in Quebec is quite strained, so it's getting a little difficult to afford houses out there.
- And we just have a few seconds left. But I want to ask you about mortgage deferral program. Now, that's certainly going to end soon. Will that impact your forecast going forward at all?
- Sure. It will. It'll result in some additional supply hitting the market, which will weigh on prices. But it's more likely to weigh on prices rather than upend prices. We don't think that the end of the mortgage deferral program will really cause a widespread price decline. And there's a myriad of factors for that, including the fact that some borrowers who took out these mortgage deferral programs are repaying.
So it suggests that some people took them out of an abundance of caution rather than need. Those who took out the deferrals have relatively high credit scores, so that's a good thing. Markets-- as I mentioned before-- are quite tight. So they can handle some additional supply. And this additional supply might be good for the market in terms of prices. So it can handle some additional supply before we see some sustained downward momentum in prices. So, there's lots of factors that we think will reduce the impact of the end of the mortgage deferral programs.
- Rishi, thank you very much for your time.
- Thanks, Anthony.
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