Will the housing market crash? Why home prices may stay hot

This is the third installment of Priced Out, a three-part series looking at housing affordability challenges facing young people in Canada. Read part one: ‘Nowhere to go’: Canadian homebuyers without family help are running out of options. And part two: ‘Incredibly stressful:’ Why renting isn’t always a solution for those who can’t buy.

During the earlier stages of the COVID-19 pandemic in Canada, Anita Minh and her partner saw a possible silver lining.

“We thought maybe there is an opportunity to enter the (housing) market,” says Minh, a 31-year-old, Vancouver-based Ph.D. candidate at the University of British Columbia.

She calls homeownership “a dream” — and it’s one she says she’s been holding onto for a long time. After growing up in rental properties and moving around a lot — “we had very good landlords, but eventually, they would sell” — she says she associates owning a home with security and stability.

And at the onset of the pandemic, Minh wondered whether home prices would finally come down a bit and her dream might come true.

She wasn’t alone in thinking the health emergency might cool off Canada’s priciest housing markets. In May of 2020, the Canada Housing and Mortgage Corp. (CMHC) warned of home prices possibly declining as much as 18 per cent from the peak of the first three months of 2020.

View image in full screen

Instead, Canada went on to record an extraordinary housing boom that extended far beyond the traditional housing hotspots of Vancouver and Toronto. As of April, home prices nationwide were up an eye-watering 23 per cent compared to the same month in 2020, according to the Canadian Real Estate Association (CREA).

For young Canadians like Minh, the question is where home prices are headed next and whether an actual opportunity to jump into the market will present itself in a not-so-distant future.

While the breakneck pace of appreciation of the pandemic housing market has widely been dubbed “unsustainable,” many housing market watchers say when the border reopens new demand from immigration may keep the pressure on prices.

“There are people out there who are assuming that there’s going to be a home price correction and prices have to fall because they’ve gotten so high. And that’s certainly possible,” says Mike Moffatt, senior director of the Smart Prosperity Institute.

But a housing bust isn’t the only possible outcome, Moffatt adds.

“There is a very real possibility that home prices could continue to rise, particularly if the borders open and we’re able to attract international talent at the same rate as we have in the past.”

2:17 Priced out: Renters facing challenges during a red-hot pandemic housing market

Demographics is one of the many factors that contributed to the pandemic housing craze, says Sri Thanabalasingam, senior economist at TD Bank Group.

While Canada’s borders have been closed to most immigrants since March 2020 to limit the spread of COVID-19, the government of Prime Minister Justin Trudeau has been increasing immigration targets to offset an aging population and boost the Canadian economy.

Between 2016 and 2019, Canada welcomed nearly one million new permanent residents, data from Immigration, Refugees and Citizenship Canada (IRCC) show. And between 2017 and 2018, net immigration accounted for 80 per cent of the country’s population growth, according to IRCC.

That increase likely helped fuel housing demand during the pandemic, Thanabalasingam says. When mortgage rates dropped amid the economic crisis created by the health emergency, housing became temporarily more affordable, allowing more people to enter the market, he notes.

At the same time, government lockdowns and stay-at-home orders created a yearning for larger homes and backyards, pushing homebuyers further away from city cores and into smaller towns and rural areas, he adds.

Lower borrowing costs and the sudden need for more space triggered what Thanabalasingam calls a “pull-forward” of housing demand. In other words, many of Canada’s prospective homebuyers, whose ranks had been growing thanks to immigration, decided to pull the trigger on a purchase at the same time because of the conditions created by the pandemic.

Soaring numbers of international student enrolment are also feeding into the demand for housing, and not just in the rental market, according to Moffatt.

“In the GTA (Greater Toronto Area) alone at any given point in time we have around one 150,000 … individuals on international student visas,” he says.

In 2019 alone, Canada issues more than 402,000 new study permits, according to IRCC.

And a significant number of those students settles here for good, thanks to Canada’s easy path to permanent residency, Moffatt notes.

But while that pool of educated newcomers with Canadian credentials is a coveted resource for the labour market and the economy, it also creates a demand for housing for which governments at all levels have largely failed to plan, Moffatt says.

“It’s great to be able to get this cohort of talented 20-somethings,” he says. “We just need to make sure that we have enough housing for everyone.”

4:36 Priced Out: A look at why the hot housing market is out of reach for young Canadians

As Ottawa eyes the end of the pandemic, immigration is set to resume. Canada is targeting 401,000 new permanent residents in 2021, 411,000 in 2022 and 421,000 in 2023, equal to about one per cent of the population for each of those years.

The impact on the demand for homeownership will likely be felt with a lag, Thanabalasingam says. Typically immigrants live in rental properties at first as they settle in a new country and take a few years to save up for a down payment.

In the near future, Thanabalasingam sees the housing market cooling off “a bit” in the second half of 2021, with sales volume coming down from “unsustainable” levels and possibly price growth slowing down.

There are already signs that the market may be taking a breather. The pace of home sales slowed down in April with the number of properties that changed hands falling by 12.5 per cent compared with the record high set in March, according to the Canadian Real Estate Association (CREA).

Tougher mortgage rules for both insured and uninsured mortgages, which came into effect June 1, will likely also pour some cold water onto the sizzling hot market, he says.

But because of a shortage of housing supply, he adds, “we could see elevated prices for some time to come.”

In Vancouver, Minh, the Ph.D. student, says she and her partner are weighing the option of being long-term renters versus leaving the city, where they have family, friends and their jobs, and moving somewhere cheaper.

The uncertainty is difficult to cope with, she says.

“This mentality is really stressful.”