Why Was the Canadian Housing Market So Stable in 2020?
Updated: Mar 29, 2021
Policy Brief by Alexander Stoney
At the end of September, the Canadian Mortgage and Housing Corporation (CMHC) released their third-quarter (Q3) report for 2020. This report is published following each fiscal quarter and offers an assessment of the current housing market climate and predictions for the remainder of the year [1]. The CMHC’s Q3 report highlights the current market environment.
Despite the unpredictability caused by the global pandemic, the Canadian housing market has remained surprisingly stable. Increased unemployment, the implementation of social distancing measures, the discouraging of travel, and the nationwide economic slowdown were expected to dramatically impact the supply and demand of housing across the country [2]. However, the feared crash was avoided and in its place was a more gradual decline in market activity.
This was in large part due to the strong monetary policy implemented by the Bank of Canada. In April of 2020, the Bank lowered interest rates to a record low to encourage Canadians to continue investment and spending [3]. In addition, the Canadian government implemented emergency wage subsidies such as the Canadian Emergency Response Benefit (CERB) which meant that Canadians maintained a sustainable level of disposable income. The combination of this expansionary monetary and fiscal policy did not prevent a decline in the housing market but did succeed in softening the impact and making it more gradual and thus manageable. However, in the Q3 report, there is a concern raised that the housing market is becoming increasingly vulnerable as the pandemic continues due to its dependence on temporary emergency benefits [4]. Because they are temporary, there is a worry that the stability is unsustainable and, as CERB and other benefits are terminated and taxes begin to rise, the housing market will be affected.
One of the outcomes that most concerns the CMHC is economic overheating. Economic overheating refers to a situation where a market’s capacity to produce cannot keep up with its aggregate demand. It is generally caused when an economy is experiencing below average rates of growth resulting in a decrease in production and demand either remains the same or even increases [5]. If markets overheat, national recessions can worsen as central banks are forced to reduce demand and thus limit investment and economic growth. The Canadian housing market this year is worryingly approaching a state of overheating as demand for housing has remained high and yet supply (housing inventory) has decreased. Buyers who are spending more time at home in smaller apartments and smaller homes are looking to move into larger homes with more space. At the same time, sellers who occupy the larger homes in demand are deciding not to sell due to an unwillingness to move during a pandemic [6]. This interplay between buyers and sellers creates scarcity driving up the prices of houses. This is an important reminder that it is a mistake to regard house prices as a direct, true signal of a strong housing market.
According to the Ottawa Business Journal report, overheating has already occurred in Ottawa’s housing market. This is due to the fact that many residents of Ottawa are employed by the public and/or tech sector, two sectors that have largely avoided widespread layoffs and job loss [7]. Therefore, with a large percentage of the city’s population able to continue working throughout the pandemic, demand has remained stable but supply has significantly decreased. The dangers of market overheating is a “price-spiral” where, due to the scarcity of products, market prices rise faster and with greater volatility. Generally, economic theory shows that overheated markets can lead to numerous problems, including the loss of healthy market competition which can result in job loss and bankruptcies [8]. This may be a warning for the housing market of problems to come.
In conclusion, although the CMHC’s report shows that the COVID-19 pandemic has weakened the national housing market, Canadians should be encouraged by the relative stability that the housing market has maintained throughout the crisis. The CMHC commend the monetary and fiscal policy that has been implemented through this pandemic as a means of reducing the shock to the housing market. However, they also stress the vulnerability of the housing market in this economic environment, particularly as the pandemic extends into the winter months. The CMHC points to market overheating in Ottawa as a warning sign for the country. As the promise of an effective COVID-19 vaccine takes shape, it is to be hoped that market stability will last through to the end of the pandemic and through the subsequent economic rebuild.
Canadian Mortgage and Housing Corporation . “Housing Market Assessment.” Housing Market Assessment. Government of Canada, September 21, 2020. https://assets.cmhc-schl.gc.ca/sites/cmhc/data-research/publications-reports/housing-market-assessment/2 020/housing-market-assessment-68456-2020-q03-en.pdf?rev=5535c072-853e-4bb1-a3d3-4c536dd539a0.
Ibid.
Ibid.
Ibid.
Central Bank of Ireland. “Explainer - What Does Overheating in the Economy Mean?” Central Bank of Ireland. Accessed November 23, 2020. https://www.centralbank.ie/consumer-hub/explainers/what-does-overheating-in-the-economy-mean.
Canadian Mortgage and Housing Corporation . “Housing Market Assessment.” Housing Market Assessment. Government of Canada, September 21, 2020. https://assets.cmhc-schl.gc.ca/sites/cmhc/data-research/publications-reports/housing-market-assessment/2 020/housing-market-assessment-68456-2020-q03-en.pdf?rev=5535c072-853e-4bb1-a3d3-4c536dd539a0.
OBJ Staff. “Ottawa Housing Market 'Overheating,' CMHC Says.” Ottawa Business Journal, September 21, 2020. https://obj.ca/article/real-estate/residential/ottawa-housing-market-overheating-cmhc-says.
Central Bank of Ireland. “Explainer - What Does Overheating in the Economy Mean?” Central Bank of Ireland. Accessed November 23, 2020. https://www.centralbank.ie/consumer-hub/explainers/what-does-overheating-in-the-economy-mean.