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Housing markets in Canada and the U.S. are both considered red hot. But home price and sales metrics show that Canada is handedly outperforming its southern neighbour. Anthony Okolie speaks with Sri Thanabalasingam, Senior Economist, TD Bank, about the key differences between the two markets.
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[MUSIC PLAYING]
- Sri, in your latest report, you compare the Canadian and US housing markets, both of which have been on a tear. But before we go into the details, talk to us about some of the similarities of the two markets.
- Right. One of the biggest factors that are impacting both markets is the steep drop in mortgage rates. So at the onset of the pandemic, both the Federal Reserve and the Bank of Canada slashed interest rates. They enacted the quantitative easing program, both of which brought interest rates over the yield curve down lower.
There was a flight to safety as well. And that put even further downward pressure on interest rates. All this translated to a near 100 basis points drop in mortgage rates, both in Canada and the US, over the course of 2020. And that, itself, triggered what we're seeing in terms of housing frenzies, both north and south of the border.
- And I thought this was very interesting because you say in a report that the pickup in housing in Canada has been far stronger than that in the US. So why is that?
- One of the important reasons here is past population growth. So over the last decade, the population growth in Canada has outpaced that in the US. And this divergence really grew in 2016 to 2019. And this was coming from net non-permanent residents, particularly international students. And many of these people, they chose to stay in Canada as well. So with Canada's immigration program providing them a platform to residency in Canada, many of them took on that opportunity. And then we saw that continue in 2020, as well, during the pandemic. Many of them were already in Canada.
So this supported home ownership demand. And that was one of the important reasons why Canada diverged away from the US in terms of housing market activity.
- Talk to us a little bit about Fear Of Missing Out, or FOMO, as well as speculation and what impact would those have on housing.
- Right. And those are two other factors that are differentiating in Canada and the US. So in the 2008 housing market crash, the US was a hit a lot harder. Home prices declined in the double digits, where in Canada you had nearly two decades of increases in home prices. So it was a pretty safe bet here in Canada. So there's less scarring on Canadians from the 2008 housing market crash compared to Americans. And this is one of the factors that contributes to a fear of missing out as the housing market heats up north of the border.
Now, on speculation with home prices increasing quite quickly, we could see-- or we are seeing-- speculative activity also increase and contribute to the housing market activity. And the Bank of Canada recently came out and said they are seeing signs of excess exuberance in the housing market.
- And I want to talk a little bit about the US, because, certainly, they're a little bit ahead of us in terms of their vaccination roll-outs. What can we learn from the US experience as they move closer to reopening their economy?
- Right. So the US is ahead in terms of vaccination rollout, as well as reopening the economy. So if you think about some of the factors, other factors that have driven the housing market, both in Canada and the US, specifically, the race for space, which is people working from home so they choose or they chose to move out to the suburbs from urban cores. This sort of impact could fade. So as more people choose to remain in the urban areas or choose to move to urban cores, that sort of impact, if it dissipates, then you have less demand for home ownership, specifically out in the suburbs.
And so developments in the US could foreshadow how Canadian housing may develop, as well, when we think about as both countries emerge out of this pandemic.
- And do you expect Canada's housing market to continue to outperform the US housing market, going forward?
- Right. So that being said, in terms of similar factors, there are also very unique factors to Canada, as I had mentioned earlier on. And so if FOMO, for example, if that persists, or speculative activity becomes a more important driver of housing activity in Canada, this divergence could continue on in the near term.
- So based on your assessments, what are the risks of a potential housing market correction in Canada?
- Well, in terms of a housing market correction, there's still tight supply of housing in Canada, as well as robust home ownership demand so that should support home ownership prices, reducing the risk of a steep correction in the near to medium-term. Now, if, as I had mentioned, speculative activity becomes a more important driver of housing activity as a whole and housing moves away from economic fundamentals as a whole, then the risk of a steeper housing market correction rises.
And so that's what we have to be careful about. And both demand and supply-side housing policies could return the market to a more balanced territory.
- Sri, thank you very much for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
- Sri, in your latest report, you compare the Canadian and US housing markets, both of which have been on a tear. But before we go into the details, talk to us about some of the similarities of the two markets.
- Right. One of the biggest factors that are impacting both markets is the steep drop in mortgage rates. So at the onset of the pandemic, both the Federal Reserve and the Bank of Canada slashed interest rates. They enacted the quantitative easing program, both of which brought interest rates over the yield curve down lower.
There was a flight to safety as well. And that put even further downward pressure on interest rates. All this translated to a near 100 basis points drop in mortgage rates, both in Canada and the US, over the course of 2020. And that, itself, triggered what we're seeing in terms of housing frenzies, both north and south of the border.
- And I thought this was very interesting because you say in a report that the pickup in housing in Canada has been far stronger than that in the US. So why is that?
- One of the important reasons here is past population growth. So over the last decade, the population growth in Canada has outpaced that in the US. And this divergence really grew in 2016 to 2019. And this was coming from net non-permanent residents, particularly international students. And many of these people, they chose to stay in Canada as well. So with Canada's immigration program providing them a platform to residency in Canada, many of them took on that opportunity. And then we saw that continue in 2020, as well, during the pandemic. Many of them were already in Canada.
So this supported home ownership demand. And that was one of the important reasons why Canada diverged away from the US in terms of housing market activity.
- Talk to us a little bit about Fear Of Missing Out, or FOMO, as well as speculation and what impact would those have on housing.
- Right. And those are two other factors that are differentiating in Canada and the US. So in the 2008 housing market crash, the US was a hit a lot harder. Home prices declined in the double digits, where in Canada you had nearly two decades of increases in home prices. So it was a pretty safe bet here in Canada. So there's less scarring on Canadians from the 2008 housing market crash compared to Americans. And this is one of the factors that contributes to a fear of missing out as the housing market heats up north of the border.
Now, on speculation with home prices increasing quite quickly, we could see-- or we are seeing-- speculative activity also increase and contribute to the housing market activity. And the Bank of Canada recently came out and said they are seeing signs of excess exuberance in the housing market.
- And I want to talk a little bit about the US, because, certainly, they're a little bit ahead of us in terms of their vaccination roll-outs. What can we learn from the US experience as they move closer to reopening their economy?
- Right. So the US is ahead in terms of vaccination rollout, as well as reopening the economy. So if you think about some of the factors, other factors that have driven the housing market, both in Canada and the US, specifically, the race for space, which is people working from home so they choose or they chose to move out to the suburbs from urban cores. This sort of impact could fade. So as more people choose to remain in the urban areas or choose to move to urban cores, that sort of impact, if it dissipates, then you have less demand for home ownership, specifically out in the suburbs.
And so developments in the US could foreshadow how Canadian housing may develop, as well, when we think about as both countries emerge out of this pandemic.
- And do you expect Canada's housing market to continue to outperform the US housing market, going forward?
- Right. So that being said, in terms of similar factors, there are also very unique factors to Canada, as I had mentioned earlier on. And so if FOMO, for example, if that persists, or speculative activity becomes a more important driver of housing activity in Canada, this divergence could continue on in the near term.
- So based on your assessments, what are the risks of a potential housing market correction in Canada?
- Well, in terms of a housing market correction, there's still tight supply of housing in Canada, as well as robust home ownership demand so that should support home ownership prices, reducing the risk of a steep correction in the near to medium-term. Now, if, as I had mentioned, speculative activity becomes a more important driver of housing activity as a whole and housing moves away from economic fundamentals as a whole, then the risk of a steeper housing market correction rises.
And so that's what we have to be careful about. And both demand and supply-side housing policies could return the market to a more balanced territory.
- Sri, thank you very much for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
