May 13, 2021

It's a seller's market

The Canadian housing market is on fire, and it’s the perfect time to sell — as long as you don’t need to buy another house. With record numbers of transactions and an average increase in price of 20%, demand is at a high. Buyers find themselves in bidding wars and new listings remain on the market only a handful of days.

  • Perfect storm for the housing market
  • Big centres left behind (for once)
  • Too early for concern

 

It’s a great time to sell your house – as long as you don’t need to buy another one. The Canadian housing market is on fire and the statistics are staggering.

 

According to the Canadian Real Estate Association (CREA), March 2021 saw over 76,000 transactions occur via the Canadian MLS system. This is 40% more than the highest sales level for March on record. In fact, it beats the highest level of activity for any month in history by over 20%! 

 

Of course, sky-high demand leads to price increases, and we saw an average of a 20% increase in prices across Canada for the year ending March 31, 2021. This level of activity is getting a lot of attention and deservedly so. In many markets, homes are going for an average of 5-15% above listing price, bidding wars are common and days on the market for new listings are low. 

 

Housing Prices Surge 

Home Price Index Performance Over Time 

Home Price Index Performance Over Time

Note: Aggregate MLS® HPI time series include data for all participating boards/associations. The data is revised back to January 2005 as additional boards/associations join the MLS® HPI. Actual MLS® HPI data when they are statistically significant.

Source: The Canadian Real Estate Association 

  

Typically, when prices for any asset rise dramatically in a short period of time it’s prudent to ask, what is driving the change? Is it fundamentals or speculation? In the case of the Canadian housing market, we think it’s mostly a rational increase based on some unique fundamentals due to the pandemic.

 

Today’s housing market is really being driven by unprecedented demand. Although we often hear about supply issues in the media, it really doesn’t appear to be true. As seen below, the last three quarters have seen extremely strong listing activity. Demand has simply been stronger which has led to the price increases. 

 

Residential New Listings in Canada* 

Residential New Listings Canada

*Seasonally adjusted data at annualized rates

Source: The Canadian Real Estate Association 

 

In our view, there are four main factors driving the demand growth:

  1. Interest rates are at historical lows. Falling rates have been the wind behind the housing market’s back for decades. The pandemic saw rates fall to new lows, which has increased affordability and financial flexibility.
  2. Significant increase in savings. Personal disposable income has actually increased during the pandemic and a lot of the increase has gone to savings as expenses have come down in many cases. This recovery has disproportionately helped those who are better off. According to CMHC, workers making $36/hr or more have seen employment rise by around 10% over the past year. These are the typical homebuyers. Those making $17.50/hr or less have seen employment rates fall by 20%.
  3. Non-mortgage debt is lower than pre-pandemic. Higher savings and lower rates make a powerful combination for buyers to bid up prices for their dream home.
  4. Work from home. The pandemic has seen a completely new trend of people leaving the city. If you can work from anywhere, why not buy a larger home for less money in an area with less congestion? The market in Ontario is a perfect example of this phenomenon. The chart below shows twelve-month price increases in Toronto compared to a city that has traditionally been a long commute option (Barrie), and one that has not previously been considered a commuter option (London). For the first time in a long time, the steepest increases in prices are happening in secondary markets and not in Toronto or Vancouver.


% Difference From 12 Months Ago (March 2020 to March 2021) 

% Difference From 12 Months Ago (March 2020 to March 2021)

Note: Aggregate MLS® HPI time series include data for all participating boards/associations. The data is revised back to January 2005 as additional boards/associations join the MLS® HPI. Actual MLS® HPI data when they are statistically significant.

Source: The Canadian Real Estate Association 

 

Prices will likely continue to increase in Q2 before they start to moderate. Once the economy is fully opened up, people will again have other things to spend their money on. It’s likely that prices in secondary markets (like London and Barrie) will moderate or even correct if the return to office is more pervasive than expected, or if some buyers move back to the city, or the tide of those leaving levels off. Mortgage rates should rise somewhat (and already are modestly) putting downward pressure on prices – or least on price increases.

 

We do acknowledge that increases in price and activity that are this rapid need to be monitored, and that there is always a risk that what appears logical can turn into rampant speculation. If we were to see three or four plus years of double-digit price increases, we would be much more concerned. By then, pandemic factors will have subsided and it would be much more likely that speculation was driving the market rather than fundamentals. For now, we are not worried that housing activity will spill over into the economy in a negative way.