Green shoots are showing in real estate recovery, but hurdles remain

Tuesday, July 7, 2020   /   by Sergey Korostensky

Green shoots are showing in real estate recovery, but hurdles remain

Housing markets in Canada showed considerable strength in May when home sales jumped 56.9 per cent higher from sales in April and new listings rose even higher, confirming an increase in both demand and supply. 

Though the green shoots of a real estate recovery are appearing, numerous hurdles and uncertainties must still be overcome for a sustained improvement in housing markets.

For one thing, new regulations starting in July will likely limit some borrowers’ ability to qualify for a mortgage. Markets supported by stimulus spending and forbearance programs could also take a turn for the worse if consumption and production fail to quickly march back to pre-COVID-19 levels.

Recently released data by the Canadian Real Estate Association (CREA) showed that the month-over-month change in sales in May carried some good news, but year-over-year sales were still down by almost 40 per cent. Looking farther back reveals that sales in May were the lowest recorded for the month in more than two decades.

Housing markets have been struggling with the pandemic blues since mid-March. But not all markets are beating at the same pulse, as 2.5 months of data show. Let’s take a look specifically at three metrics: sales (an indicator of housing demand), new listings (a sign of supply) and prices, which emerge at the intersection of demand and supply.
In Montreal, the housing market reported a stellar 92.3 per cent increase in May sales compared to April, and surges were also observed in Calgary (68.7 per cent), Edmonton (46.5 per cent) and Winnipeg (45.6 per cent).

Toronto, Canada’s largest housing market, reported a 53 per cent increase during the same period. But nearby Hamilton and Burlington reported a more substantial increase of 69.4 per cent. A similar trend was observed in Greater Vancouver, where sales in May increased by just 20.5 per cent (the lowest rate among the large housing markets), while neighbouring Fraser Valley was up 68.7 per cent.

At the same time, listings have recovered at a faster rate than sales, suggesting that sellers are bullish about the real estate market. It could also be a result of the impending change in mortgage regulations that will become effective July 1.

The Canada Mortgage and Housing Corp. (CMHC) has announced it is tightening regulations to qualify for a CMHC-insured mortgage, which include increasing the minimum credit score, lowering the debt-service ratio and disallowing non-traditional sources of funds for the down payment “as equity for insurance purposes.”

The changes will likely reduce the qualifying loan amount for future homebuyers. However, sales in May and June will continue to be insured under the existing rules. Hence, sellers are motivated to list now to sell their homes under the relatively permissive regulations.

New listings across Canada were up by 69 per cent in May compared to April, but 38 per cent lower year over year. Like sales, the noticeable increase in new listings relative to April is indicative of housing markets recovering from the lockdown’s initial shock, which brought markets to their knees in the latter half of March and most of April.

Similar to sales, new listings in Montréal for May were up 204.7 per cent from April. Even more significant increases in listings were observed in smaller housing markets in Québec. New listings were up just 35.8 per cent in the Greater Toronto Area, but rose 91.6 per cent in Calgary and 86.5 per cent in Edmonton.

CREA reports a quality-adjusted home price index to account for the diversity in size and type of housing being sold over time, making it a better indicator than average housing prices.

Its data showed that despite the alarm about the impending collapse of housing prices, national aggregate benchmarked prices in May were down by a mere 0.08 per cent from the month before and up 0.34 per cent from three months earlier.

Similar small fluctuations were noted in the Montreal region (up 0.56 per cent) and the Toronto regional markets (down 0.11 per cent).

The significant increases in listings and sales along with housing prices holding firm in May must not be confused with the beginning of a sustained long-term recovery in the real estate markets. Such optimism would be premature.

It is also too early to speak of a post-COVID-19 recovery. The pandemic is still out there, and it’s targeting places that were earlier deemed safe and free of the disease.

The trillions of dollars spent on stimulus funding globally, including hundreds of billions of dollars (counting loan, mortgage and rent forbearance) in Canada, are temporary fixes to boost consumption. Implicit in stimulus funding is the hope that markets will pick up before the funds run out.

If the economic engines do not ramp-up fast, real estate markets could face severe challenges if demand dries up as job losses start to spread across industries. But in the meantime, one cannot help but be in awe of the resilience of Canadian housing markets.