Reports of the Canadian housing market’s death have been greatly exaggerated.
That’s the opinion of Scotiabank chief economist Jean-Francois Perrault in a research note that says the real estate market is experiencing a “Covid-related pause” rather than a prolonged downturn.
“Concerns of a significant adjustment in housing markets appear overblown,” the report from Perrault and Scotiabank modelling and forecasting director René Lalonde said.
National housing prices will decline modestly to about 4% lower by year-end relative to the same period last year, and then rise by about 11% by the end of 2021, they wrote.
The report comes after real estate boards reported dismal April numbers due to physical distancing measures and the broader economic fallout from the coronavirus.
Home sales in the Greater Toronto Area plunged 67% last month, while sales in Vancouver hit their lowest levels in nearly 40 years. Toronto prices fell 11.8% from March on a seasonally adjusted basis.
A report earlier this month from rating agency DBRS warned that mortgage arrears would rise to anywhere from 65 basis points to 100 basis points depending on the severity of the Covid-19 recession. In the agency’s adverse scenario, housing prices could see a 15% correction by 2022.
On Thursday, the Bank of Canada warned that the number of households that fall behind on debt payments is likely to rise, even with deferrals.
The Scotiabank report acknowledged the long-standing concerns raised by the central bank and others about household debt.
“Given these concerns, economic trauma caused by Covid-19 could well be the trigger to a prolonged adjustment in housing markets, owing to its impact on employment, incomes, confidence, and potentially population growth,” it said.
“In our view, these fears are misplaced.”
The report points to a pre-crisis under-supply, with new housing failing to keep up with higher immigration totals since 2016. The massive unemployment resulting from Covid-19 will dampen demand but it will also affect supply, with housing starts down 20% from February, it said.
The report forecasts a 40% decline in housing sales nationally for the second quarter, followed by a 12% quarter-over-quarter rebound in Q3 and 17% rise in Q4. Housing starts will also bounce back, by 12% in the third quarter and 31% in the fourth, it said.
“Covid-19 is not expected to have a large or lasting impact on house prices,” the report said.
“The impact of the rise in the unemployment rate will be muted by the exceptional fiscal support measures relative to what has been observed historically. In the absence of exceptional fiscal support measures, for instance, the fall in house prices would be roughly double our current forecast.”
Provided population growth continues, the bank forecasts house prices exceeding pre-Covid levels by mid-2021.