Last updated on February 2nd, 2021 at 12:43 am
If you’ve paid any attention to the news lately, it appears that COVID-19 is inflating the real estate market. But why is this happening? Isn’t it odd that so many people are laid off, or facing reduced hours, and yet the real estate market is stable in most places, and red hot in others? In this article, I’ll share my thoughts on why we’re seeing a surge in real estate demand in Canada. I’ll also discuss what our current situation could mean for real estate prices going forward.
A Market Out of Balance
To understand why COVID-19 is inflating the real estate market in Canada, you first need to understand the concept of a balanced market. A balanced market is one in which the demand from buyers is equal to the supply of homes from sellers. In a balanced market, homes don’t sell too quickly or too slowly. Homes aren’t regularly driven up by bidding wars, and also don’t regularly sell for far below their list price. In a balanced market prices are generally stable, perhaps rising with inflation, but not much more than that.
Sales-To-Active Listings Ratio
A key metric for measuring whether or not a market is balanced is the sales-to-active listings ratio. This is the ratio between the number of sales in a given period and the number of active listings. So for example, in the Greater Vancouver region, there were 12,083 active listings of homes and 3,128 sales in July. Dividing the number of sales by the number of active listings gives you the sales-to-active listings ratio. For Vancouver, the sales-to-active listings ratio is 26% which would be considered an unbalanced market. A real estate market is considered to be in balance when the sales-to-active listings ratio is between 12% and 20%. A market with a sales-to-active listings ratio of more than 20% would be experiencing upward pressure on prices. When the sales-to-active listings ratio is less than 12%, one would expect to see downward pressure on prices.
As you can see from the above table, many real estate markets in Canada are way out of balance. Even with COVID-19 happening, demand for homes is often much higher than what’s available for purchase.
So, why are sales-to-active listing ratios so high across Canada? Well, the first answer is inventory. Since COVID-19 shutdowns began, inventory has been lower than historical averages for most Canadian cities. A lot of this can be attributed to it being more challenging to sell a home during a pandemic. Open houses were not possible, and sellers perceived that they would be getting a worse price for their home had they tried to sell during the height of COVID-19. This meant that a lot of sellers simply decided to wait and see how COVID-19 would affect the market, and list their home later when conditions were more favorable. These factors have caused inventory to lag, which has a direct impact on the sales-to-active listings ratio.
Only recently have more homeowners become comfortable with the idea of selling during a pandemic. But, looking at the Greater Vancouver region, it was reported that there are still 15% fewer homes for sale in July of this year than there were last year. A similar decrease is found in many other regions, like in Toronto where inventory is 16% lower than July of last year. The following chart shows how inventory is down significantly in markets all across Canada.
Pent up Demand
Pent up demand occurs when there are a lot of buyers looking for homes, but that they’ve been delayed from purchasing a home for one reason or another. As a result, there’s a whole lot of money sitting on the sidelines waiting to potentially jump into the market. Perhaps market conditions signal that they should wait, or there is a period of poor weather, or there’s a global pandemic and they don’t want to leave their house. All of these situations could lead to periods of pent up demand.
The term “pent up demand” quite accurately describes the situation we’re currently in. Since March, most regions have been under some degree of lockdown. This means that open houses were canceled and buyers couldn’t freely visit homes for sale like they normally would. Essentially, all of the regular spring demand was pushed back a few months until most regions entered “Phase 3” and sellers were once again allowed to stage open houses.
In my view, the pent up demand we’re experiencing is also fueled by another force – increased disposable income. Many homebuyers haven’t lost income like they ordinarily would have in a recession. Instead, without having to drive to work, not being able to vacation, and not visiting restaurants, a lot of Canadians have been able to accumulate even more savings over the past few months. This, along with lower interest rates, has provided a sizable boost to their purchasing power. These effects make it easier to save for a down payment and are part of the reason why we’re seeing so much activity in Canada’s real estate market lately.
In Vancouver, this pent up demand has led to sales surging in recent months. In July, the Real Estate Board of Greater Vancouver reported that residential home sales were actually up 22.3% when compared to July of last year. The sales this month were 9.4% above the 10-year average for July. Quite odd for a country in crisis, isn’t it? REBGC Chair Colette Gerber explains:
“We’re seeing the results today of pent up activity, from both home buyers and sellers, that had been accumulating in our market throughout the year.REBGV Chair Colette Gerber
This pent up demand, combined with historically low inventory, has caused prices in the Greater Vancouver region to increase by 4.5% when compared to July of last year. A similar effect can be seen in the Toronto region, where prices have jumped a whopping 17% when compared to July of last year.
Perceptions Have Changed
Another reason COVID-19 is inflating the real estate market in Canada has to do with perception. For a lot of people, the fact that not even a global pandemic could force real estate prices to fall is a sign that the market is much more resilient than originally thought. If we were in fact in a real estate bubble, wouldn’t something like COVID-19 be enough to pop it? And if not, are we really in a real estate bubble after all?
The rosy view for Canadian real estate is also driven by policy decisions made in Canada. Mortgage deferrals and overall deference towards homeowners in Canada leads one to believe that the government will continue to work hard to support homeowners, especially in times of crisis like this.
Interest Rate Forcast
These changes in perception have a lot to do with the rate decisions of the Bank of Canada. The Bank of Canada recently provided the following guidance:
Our message to Canadians is that interest rates are very low and they are going to be there for a long time. We have been unusually clear about the future path of interest rates. If you’ve got a mortgage or if you’re considering making a major purchase, or you’re a business and you’re considering making an investment, you can be confident rates will be low for a long time.Bank of Canada Governor Tiff Macklem
With this statement, the Bank of Canada is signaling to home buyers that now is the time to buy a home. They’re also suggesting, implicitly, that if you don’t buy now you could end up paying even more for the same home in the future. Some are interpreting this Bank of Canada guidance to mean that we should expect interest rates to remain as low as they are until 2023 – a very bullish indicator for real estate prices.
If you asked me back in March what I thought about Canadian real estate, I would have given you a very pessimistic assessment of the market. Even though I knew interest rates would soon hit rock bottom, I never expected to see a surge in real estate activity so soon. I especially wouldn’t have predicted that COVID-19 would inflate the real estate market in Canada. For that reason, I’ve since spent a lot of time monitoring the performance of the real estate market. I plan on continuing my analysis of the real estate market’s fundamentals, and in the process, I hope my articles can help us both become a little smarter, and a little better informed about Canada’s real estate market.
Thank you for reading my article on why COVID-19 is inflating the real estate market in Canada! If you enjoyed this article, check out my other articles. Some great choices include my analysis of the best gold ETF in Canada and my pick for the best Canadian dividend ETF!
How has COVID-19 affected your opinion of the Canadian real estate market? Did you predict a crash? Do you think a crash might be right around the corner? I’d love to hear your opinions and thoughts in the comments below!