By Mark Kerzner, President, TMG The Mortgage Group
While the tumultuous events of 2020 are leaving some scratching their heads with respect to Canadian housing activity and values, many pundits are estimating a very buoyant market in 2021. Below are some headlines I suggest watching for in 2021:
Unemployment
We have often heard that the single greatest potential impact on arrears and the mortgage market overall is employment. With 1MM taking unemployment payments, or CERB, since the outbreak, then surely that would have had a drag on housing markets – or would it?
When unemployment went from 5.6% in February to 13.7% in May our initial thoughts were of grave concern, especially when the number of Canadians seeking mortgage payment relief through deferrals started climbing into the hundreds of thousands. Today the unemployment rate has already declined well below 10%.
In actuality there was a disconnect between the unemployment rate and homebuying:
- Many of the ‘new’ unemployed were renters
- Many of the ‘new’ unemployed were in lower paying jobs (may not be those home shopping)
In fact, income actually rose during the pandemic and the savings rate went through the roof (from 3.2% in Q4 of 2019 to 7.6% in Q1 2020 to 28.2% in Q2 2020) bringing more people into the real estate market.
As lockdowns have been reintroduced in many parts of the country due to the rapid spreading of the virus, we need to keep an eye on the overall economic impact. Will more businesses have to close their doors thereby increasing unemployment, or will additional temporary government programs, designed to bridge the gap until the vaccines fully roll out, mute a potential new wave of unemployment and resulting economic downturn?
The Deferral Cliff
Although the number of Canadian households who requested either mortgage deferrals or skip-a-payment numbered more than three quarters of a million at its peak, by the end of August that number dipped below half a million. After the formal 6-month program ended at the end of September it would appear that those who were on the program have not been thrust en masse into mortgage arrears, and in many cases have not requested mortgage deferral extensions. For instance, as of September 30th, for (Scotiabank) customers whose mortgage deferrals have expired, 99.0% are current on their payments.
When all the government benefits, such as CERB, became available, many sought those benefits even if they were not previously employed or looking for work. These included students, stay-at-home parents, contract workers, gig workers, etc.
This further reinforces the notion that mortgagors were not the same (by and large) as those who required the CERB and related benefits. This would bode well for continued strength or quality in mortgage portfolios going forward.
The Market Freeze, Thaw and Heat-up
When the pandemic hit in the late winter of 2020 economists were predicting such an intense reduction in activity that for all intents and purposes would ‘freeze’ values. In the early Spring we saw just that with housing activity dropping by 40-80% in regions across Canada and prices pretty much holding steady.
August posted an increase of 33.5% year-over-year sales activity. In October, Toronto posted a 25% increase in sales activity and over 14% increase in prices. At the same time condo activity actually decreased by 8.5%.
Household expenses appear to be lower as well. Since people weren’t travelling, commuting to work, going to movies, concerts, and shows, they were earning more (on average) and spending less.
Then there’s the old story of supply and demand. And the areas we are seeing the largest price increases are also the more expensive properties with less available supply – single detached properties. Canadians are looking for more work space at home, more luxuries, and as a result, are open to buying to meet those desires.
As time passed, we became more comfortable purchasing and transacting online.
Hence, the housing market has defied the odds with increasing sales activity and price appreciation.
Interest Rates
How low can they go? The Bank of Canada has repeatedly signaled throughout 2020 that it plans to keep the overnight rate (which greatly influences bank prime rates) untouched for years to come. And while the build-up in personal savings could impact inflation (if it floods back into the market in unison which is very unlikely) the recent economic impacts felt during our recession will likely hold our fixed and variable interest rates at bay for some time to come.
That interest rates are closer to zero than they have ever been before, does not mean more people can qualify for mortgages than did in the past. In fact, the rate at which people have to qualify today is higher than it was during the global financial crisis.
Although more people aren’t qualifying to purchase, those who do qualify, that have not been impacted by the economic fallout of the pandemic, are certainly attracted by those interest rates.
More households are actually in a better position to take advantage of these low rates which should bode well for the housing market.
Housing Demographics
Are people really going to be vacating the downtown cores of major cities choosing instead space and serenity of the suburbs and country? Perhaps there are some who have decided that now is the time to exchange location for space but it is important to ask if this is a blip or a trend?
Will companies require their workforce to return to currently unoccupied office spaces, will there be an urge to return to where the action is?
It is hard to estimate how the world will look when the vaccines fully roll out and Canadians again bask in the confidence of mobility. It may be that many of us will have formed some new habits and desires but old habits may return in short order.
Furthermore, will this current shift away from condos be further exasperated by investors fleeing the space who may have previously been getting by on extremely slim margins (hoping in turn for price appreciation) as they try to take some profit or potentially reduce additional losses as rents start to drop
In Canada we have spent much time discussing the importance and impact of new immigrants. With our borders shut down for much of the past 10 months what impact (if any) will that have on our housing markets. From the demand show these past few months it would appear to have little impact at all.
Although there are hundreds of thousands of immigrants coming to Canada annually, there are also millions of Canadian expats living throughout the world (with the top three countries being US, Hong Kong and the UK). If global troubles were to persist it is not unreasonable to assume many of them would return and replacing the demand of any reduction in immigration. If the global pandemic were to resolve in 2021, the long-term reduction in demand they represent would be muted.
Furthermore, in years past Canada has been a net loser in the Brain Drain phenomenon but that trend appears to have also reversed[GM1] . “In contrast to the exodus of tech talent from Canada that dominated headlines in years past, today entrepreneurs and senior-level talent from abroad are increasingly choosing Canada.”
Geo-Political Noise
As our neighbours to the south finally appear to be moving forward after what feels like the lengthiest, most adversarial election in my memory, how will the rest of the world react? Will some nations seek to ‘test’ current US resolve? Will some nations form new trade alliances? Will we experience a period of peace and prosperity or will there be new hotbeds of conflict?
The answers to all of these questions could impact global and local economies.
Final Thoughts
Just as companies had Business Recovery Plans (although none likely had in the entirety that would have contemplated the scope of the global COVID pandemic) so too will they have re-entry plans.
I am often reminded just how short our memories are. While I can’t understand why millions of North Americans feel comfortable travelling right now I can assure you that once this pandemic is in our rear-view mirror, that number will grow exponentially.
We will return to work, to travel, to spend and to aspire to build communities.
There is no doubt that for those who have been in the housing market these past few decades have benefited financially. In addition to financial benefits there are also personal and societal benefits including pride of ownership, space, and community benefits of building stronger communities, planting roots, reduced crime, etc.
When Canadians do purchase they do so with confidence and rarely regret home ownership – “A total of 87% of the buyers surveyed were confident in the long-term financial prospects of homeownership, and their future ability to make their mortgage payments.” (CMHC 2019 MORTGAGE CONSUMER SURVEY)
Recent demand for housing is clearly an indication that homeownership remains aspirational even in the wake of a once-in-a-century pandemic. . Supply shortages continue to be a major obstacle in controlling escalating prices.
There is clearly pent-up interest in returning to work and regular activities. No doubt having a vaccine will have an impact on the overall economy. As more people become more mobile, the economy can start functioning without the supports provided by Government. The big question that may hold most of the answers is just how quickly we can vaccinate enough of the population qquickly enough to return our economy to normal levels.
There is not going to be a magical return to normal alarm that goes off, but over time the Canadian housing market, just like Canadians, will prove to be resilient with strong fundamentals.