MONTREAL ― There is little agreement these days among the prognosticators as to what exactly is headed for Canada’s housing market in the wake of the COVID-19 pandemic.
Several recent forecasts predict rising house prices this year, even amid massive job losses and a shrinking economy.
But an economist at U.K.-based Capital Economics says Canada’s house prices are set to fall, and stay down “for years” because the country can expect a decline in immigration levels.
“Demand for housing has become extremely reliant on immigration,” Stephen Brown wrote in a client note this week.
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He predicts house prices will drop 5 per cent during this crisis, and with lower immigration levels in the years to come, both prices and sales will stay below their pre-COVID-19 levels for a prolonged period.
Brown noted that “immigration has slumped following four of the past five recessions, as higher unemployment reduced the incentive to move.”
But that’s not always the case. If Canada does relatively better than other countries in the crisis, it will still be a draw.
“For instance, immigration rose after the (financial crisis of 2008-09), when Canada was relatively less affected than most countries,” Brown wrote in an email to HuffPost Canada.
If immigration does fall, the housing market will be the hardest hit part of the economy, he said.
“Investors have based their (house or condo) purchases on the assumption that immigration will keep rents growing strongly. That will be a questionable assumption even if restrictions on travel are soon lifted.”
Real-time data from rental listings sites suggests that Toronto rents have already fallen 3 to 5 per cent since the crisis began, which is “pretty big for a month,” Brown said.
At present, Canada has closed its borders to non-residents, with the exception of essential migrant workers. But unlike the U.S., which has suspended immigration during the crisis, Canada continues to process applications.
For decades, Canadian population growth came in roughly even parts from natural growth (births inside the country) and immigration. But in recent years, with the birth rate declining and immigration rising, more than 80 per cent of Canada’s population growth has come from new arrivals.
In this crisis, “the ability to move to Canada would be limited to those with existing savings or incomes to fund the move … and given unemployment rates are going to soar everywhere we would still expect a reduction in immigration,” Brown told HuffPost.
Housing faces headwinds
Other things will also work against the housing market this year, including “a record amount of supply to hit the market,” Brown noted, and the decline of Airbnb as tourism is put on hold during the pandemic.
“The drop in short-term rental demand seems like a key area of weakness for the overall housing market in the short-term,” Brown wrote. The decline in rents “seems to be because an influx of apartments that were previously serving Airbnb have come to the market, and also because few people are willing to commit to rent a place without physically seeing it.”
Yet despite all these things working against the market, Brown doesn’t expect the sort of major price corrections Canada has seen in some previous downturns.
That’s partly because the job losses have hit people at the lower end of the income ladder, and they tend to be renters, Brown said. But it’s also because of the banks’ new mortgage deferral programs.
“All this will greatly limit the number of forced sales, whether by owner-occupiers or landlords,” he wrote.
Alberta is likely to see the weakest house prices, because of the oil price slump, but because of its high house prices and reliance on immigration, “house prices in British Columbia are the most vulnerable if conditions turn out worse than we expect,” Brown wrote.