E-Sight January 18: Canada’s high-flying residential real estate

Canadian real estate continues to deliver a strong performance that will counter a portion of the weakness caused by renewed lockdowns and government restrictions to fight the second wave of COVID-19.

Canadian home sales increased by 7.2% in December to a record high of 60k units. The sales gain raised the year tally to 12.6% for 2020, with sales in December up a whopping 47.2% relative to a year earlier. Sales consistently grew faster than listings, with listings up 3.4% in December. With demand outstripping supply, resale home prices rose an average of 17% year-over-year in December. The gains have been concentrated in single-detached and more expensive homes. When the composition of sales is removed to reveal a clearer picture, unit-adjusted home prices still increased a strong 13% in 2020. In December, single-family home prices rose 16.4% year-over-year, while multi-unit (i.e. condo apartment) prices were up 4.2%. 

Housing starts dropped 12.6% in December, but this was a pullback from a very high level in November. As a result, the level of starts was 228.3k in December, which is a robust pace of home construction. The data suggests that residential construction will be a positive contributor to economic growth in the fourth quarter of 2020. It is worth noting that residential construction is likely to be less affected than many other sectors by new government constraints. For example, Ontario has shut down “non-essential” construction activities, but most residential building projects can proceed if they have already secured a building permit.

The outlook for Canadian real estate is for some moderation in the pace of sales and price growth. Any pent-up demand created by the first wave of the pandemic is now exhausted and pent-up demand from the second wave should prove limited. Mortgage rates will remain low, but they are not likely to decline this year, further stabilizing the pace. 

Variable mortgage rates should be largely unchanged, as the Bank of Canada will keep the overnight rate at its lower bound. Fixed mortgage rates should rise a bit as bond yields creep higher when the health risks diminish and the economic recovery gains momentum. The fallout of the pandemic is slower population growth from weaker immigration. That headwind on Canadian real estate didn’t exert much force in 2020, but prospects are mixed for 2021. On the one hand, immigration will be low during the second wave. But, the federal government has lofty immigration targets for when the health risks diminish. 

As vaccination reaches high coverage of the population, home listings should increase and that should temper home price growth. Nevertheless, I would still expect a high single-digit price increase in single-detached homes and a low single-digit price increase in condos in 2021. Residential real estate should outperform commercial real estate in terms of construction and price growth.

Categories: E-Sight, Economics, Real Estate

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