Moody's Analytics on the Canadian housing market's prospects

While residential property prices continue to grow, the pace of appreciation has slowed recently, and the market will have to contend with progressively stronger headwinds such as higher mortgage rates and higher unemployment levels.

According to a new report by Moody’s Analytics, the main threats are the significantly elevated unemployment level and the fresh wave of COVID-19 infections.

“The single-family home market has flourished. Record low mortgage rates and the work-from-anywhere phenomenon have juiced up house prices,” said Abhilasha Singh, economist at Moody’s Analytics. “However, weakness is evident in the condo apartment market. Condo apartment prices have started to decline in Toronto and have levelled off in Vancouver and Montreal over the past three to four months.”

Singh cited the latest data from Real Property Solutions which showed that the composite home price index rose 0.4% month-over-month and 11.3% annually in January.

“This is a strong year-over-year increase from a historical perspective, but it is the fourth consecutive month in which the index rose less than the month before,” Singh said in the report.

Further inflaming the market is the “exceedingly tight” supply-side conditions, as evident in consistently slim housing inventories nationwide.

“Resale activity rebounded … and new listings coming on to the market did not keep pace with demand,” Singh explained. “At the current sales pace, the available inventory amounts to a 1.8-month supply of existing homes, the lowest on record. Consequently, sellers remain firmly in control of the market and have been able to hike prices despite the recent economic downturn.”

Crucially, the Bank of Canada’s announcement that it will be downscaling its asset purchases could trigger across-the-board increases in interest rates, Singh warned.

“Most notably, mortgage rates will pivot and start creeping higher,” Singh predicted, “[eroding] affordability over the next year.”

However, the trend could be offset “by an increase in employment and wages,” Singh added. “As a result, housing affordability will rise in 2021 but will remain below pre-pandemic levels.”

MBN

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