Canada’s ‘Energizer Bunny’ Housing Market: 2021 Forecasts

The Canadian real estate market defied gravity last year in spite of a global pandemic and nationwide lockdowns.

The year ended with the seasonally adjusted MLS Home Price Index up 13% year-over-year with the average house price surpassing the $600,000 mark.

“It’s official, despite all the challenges, 2020 was a record year for Canadian resale housing activity,” Costa Poulopoulos, Chair of the Canadian Real Estate Association (CREA), declared.

But where do prices go from here?

Will prices finally fall, as many have been predicting since early last year? Will they moderate and return to more sustainable growth, or is it still full steam ahead?

Nobody knows for sure, of course. But we’ve compiled a rundown of some of the many (and varied) 2021 house price forecasts to get an idea of what some of the smart minds in the industry think.

Keeping in mind the fallibility of forecasting the future, we’ve also included some of the 2020 forecasts where possible.

In case we need a reminder of how “off” forecasts can be, one need not look further than the Canada Mortgage and Housing Corporation’s (CMHC) prediction of a 9% to 18% decline from the pre-COVID peak by the end of 2020. That was a prediction that did not age well.

CREA

• 2021 forecast: +9.1%
  • 2020 forecast: +6.2%
• Commentary: “(we are) anticipating healthy housing price growth in 2021, with move-up and move-over buyers continuing to drive activity in many regions across the Canadian housing market. An ongoing housing supply shortage is likely to continue, presenting challenges for homebuyers and putting upward pressure on prices.”
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CMHC

• 2021 forecast: -9% to -18% (pre-COVID peak-to-trough decline)
  • The agency first released this forecast last spring at the height of the first wave of the pandemic. While the timeframe has been been pushed out, CMHC continues to stand by this forecast.
  • 2020 forecast: an average MLS Price of between $506,200 and $531,000
• Commentary: “When I say I stand by our forecasts, it’s really with respect to what are the broad trends we expect moving forward,” CMHC Chief Economist Bob told reporters in September. “When I look at the housing market there are a tremendous number of risks.”
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Real Estate Firms

Royal LePage

• 2021 forecast: +5.5%
  • 2020 forecast: +3.2%
• Commentary: “Across the country, a large number of hopeful buyers intent on improving their housing situation were not able to find the home they were looking for this year, as the inventory of properties for sale came nowhere near to meeting surging demand. With policy-makers all but promising record-low, industry-supportive interest rates to continue, we do not see this imbalance improving (this) year. The upward pressure on home prices will continue.”
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RE/MAX

• 2021 forecast: +4% to 6%
  • 2020 forecast: +3.7%
• Commentary: “(We are) anticipating healthy housing price growth in 2021, with move-up and move-over buyers continuing to drive activity in many regions across the Canadian housing market. An ongoing housing supply shortage is likely to continue, presenting challenges for homebuyers and putting upward pressure on prices.”
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The Banks

RBC

• 2021 forecast: +8.4%
• Commentary: “We see little that will stop activity or prices from reaching new heights in the year ahead…Yet we also expect cooling signs to emerge, which will come into fuller display in 2022. The main restraining factors will be a lack of supply, waning pandemic-induced market churn, a modest creep-up in interest rates and an erosion of affordability. Call it a 2022 soft landing.”
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TD

• 2021 forecast: +5.8%
  • TD is calling for an initial plunge in home prices of 7% in early 2021, before recovering in the latter part of the year to post an overall year-over-year price gain.
• Commentary: “Canadian prices will likely drop through the first half of 2021 by around 7%, before regaining some traction later (in the) year. While this sounds like a big hit, it would still leave the upward trend in prices, established prior to the pandemic, in place. Some added pressure on prices could emerge on the supply side. Case in point, the end of mortgage deferral programs is likely to spark some additional supply on the market.”
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CIBC

• 2021 forecast: +2.4%
  • This is based on an average of the bank’s upside case of an 11.2% price gain vs. its downside case of a 6.9% decline over the next 12 months.
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National Bank of Canada

• 2021 forecast: -5.2%
  • This is based on an average of the bank’s upside case of a 1.5% price decline in 2021 vs. its downside case of a 9.9% decline.
• Commentary: “We were pleasantly surprised by the performance and house prices so far during the pandemic. Although in our forecasts, particularly in the pessimistic case, we don’t assume strength in the housing market. I think for the macroeconomic scenarios, and that which goes into generating our allowances, you can consider those scenarios quite prudent.”

BMO

• 2021 forecast: +6.6%
  • This is based on an average of the bank’s quarterly MLS Home Price Index forecasts, ranging from +11.6% in Q1 to +0.5% by Q4.
• Commentary: “We expect the market to lose some momentum in the months ahead, as tighter mobility restrictions, the small back-up in long-term yields, the ongoing absence of immigration, and still-soft employment conditions will weigh. To be clear, we don’t look for a reversal in the broader (housing) market, just some moderation from (December’s) extraordinary results. After all, ‘stay at home’ doesn’t translate to ‘don’t buy a home.’“
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Scotiabank

• 2021 forecast: +0.4%
• Commentary: “The delay of some activity into H2-2021, when we had already expected widespread inoculation to lift economic growth, likely means stronger second-half activity than we previously anticipated. Rock-bottom interest rates, ongoing federal and provincial fiscal supports, and the current supply-demand tightness should also contribute to home price gains over the medium-term.”

Credit Rating Agencies

Moody’s Analytics

• 2021 forecast: -7% (peak-to-trough decline)
• Commentary: “The housing market will no longer be able to escape the poor condition of the labour market as vacancy and delinquency rates rise in 2021…Fortunately, the declines will be brief and the restoration of robust job growth in 2022 along with Canada’s strong demographics will put a floor under the housing market.”
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Fitch Ratings

• 2021 forecast: -5%
• Commentary: “We attribute the expected decline to lower demand caused by elevated levels of unemployment and increasing affordability issues…Although we expect delinquencies to increase in 2021, we do not expect the level of delinquencies, distressed sales or foreclosures to increase to the levels seen in the U.S. during the financial crisis.”
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–Steve Huebl

Bank of Canada Still Expects No Rate Increases Until 2023.

The Bank of Canada, this morning, released its January Monetary Policy Report (MPR), showing they expect to keep overnight interest rates at its “effective lower bound” of 0.25% until 2023 (see chart below). To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its Quantitative Easing (QE) program–buying $4 billion of Government of Canada bonds every week until the recovery is well underway. The central bank indicated it could pare purchases once the recovery regains its footing.

According to the Bank’s press release, “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our projection, this does not happen until into 2023.” Officials are apparently optimistic about the economy’s prospects once the vaccine is sufficiently distributed and injected. There is no indication that they are planning additional measures to ease monetary policy.

This is particularly noteworthy for two reasons: 1) some economists had been speculating that the Bank would lower the overnight rate by 10-to-15 basis points to help mitigate the impact of continued and broadening lockdowns; and, 2) others thought the early development of the vaccine would trigger sufficient growth to warrant a rate hike in 2022. In the Bank’s current view, neither is likely to be the case. Why mess with a minute cut in already record-low interest rates when mortgage lending is still strong? The slow rollout of the vaccine and the mounting second wave of cases assure weak economic activity in Canada at least until the second half of this year.

As well, inflation remains surprisingly muted. In a separate release today, Stats Canada revealed that price pressures in Canada unexpectedly slowed in December as the country endured a new wave of lockdowns. After climbing to the highest since the pandemic in November, the latest reading shows price pressures are still well below the Bank of Canada’s 2% target. That’s consistent with the view from policymakers that inflation will remain subdued for some time.

The pandemic’s second wave has hit Canada very hard, and the vaccine rollout has been disappointing (see chart below). Today’s MPR predicts that the economy will contract in the first quarter of this year. Economic weakness could be exacerbated by the Canadian dollar’s strength, which moved to above 79 cents US following today’s BoC announcement. Ten-year yields edged up modestly as well.

Bottom Line

For the year as a whole, economic growth is expected to be around 4% in 2021, compared to a contraction of -5.5% last year. As the inoculated population grows, the Bank forecasts an acceleration in growth to just under 5% in 2022 and a more-normal 2.5% in 2023. According to the January MPR, “The medium-term outlook is stronger than in the October Report because of vaccines’ positive effects, greater fiscal stimulus, stronger foreign demand and higher commodity prices. Meanwhile, potential output has also been revised up, reflecting an improved projection for business investment and less scarring effects on businesses and workers. There is considerable uncertainty around the medium-term outlook for GDP and the path for potential output. Thus, while the output gap is expected to close in 2023, the timing is particularly uncertain.”

Concerning housing activity, the report said, “Demand for housing has continued to show resilience, despite increasing case numbers and tightening restrictions. Housing activity should remain elevated into the start of 2021, supported by low borrowing rates and resilient disposable incomes. Changes in homebuyers’ preferences have also played a role. For example, price growth has been strongest for single-family homes and in areas outside city centers,” shown in the chart below.

–Dr. Sherry Cooper

2020 Was a Blockbuster Year for Housing

Despite the fears leading into the pandemic last Spring, 2020 marked a record number of home resales as new listings lagged and prices climbed. December housing data released by the Canadian Real Estate Association (CREA) today shows national home sales surged 7.2% month-over-month (m-o-m) at a time of the year when housing is normally slow. The chart below shows that resales were impressively above their 10-year average. The seasonally adjusted activity was running at an annualized 714,516-unit pace in December 2020 – the first time on record that monthly sales (at seasonally adjusted annual rates) have ever topped the 700,000 mark.  It was a new record for December by a margin of more than 12,000 transactions. For the sixth straight month, sales activity was up in almost all Canadian housing markets compared to the same month in 2019.

The increase in national sales activity from November to December was driven by gains of more than 20% in the Greater Toronto Area (GTA) and Greater Vancouver.

On a year-over-year basis (y-o-y), activity rocketed upward by 47.2% as interest rates hit record lows, housing needs changed owing to the pandemic, and supply was insufficient to meet demand. The housing boom occurred despite the fall in population growth, reflecting the dearth of new immigration. The yearly change in population growth in Canada nosedived in 2020 after climbing powerfully in the prior four years. Despite this headwind, for 2020 as a whole, 551,392 homes traded hands over Canadian MLS® Systems – a new annual record. This is an increase of 12.6% from 2019 and stood 2.3% above the previous record set in 2016.

New Listings

“The stat to watch in 2021 will be new listings, particularly in the spring – how many existing owners will put their homes up for sale?” said Shaun Cathcart, CREA’s Senior Economist. “We already have record-setting sales, but we know demand is much stronger than those numbers suggest because we see can see it impacting prices. On New Year’s Day, there were fewer than 100,000 residential listings on all Canadian MLS® Systems, the lowest ever based on records going back three decades. Compare that to five years ago, when there was a quarter of a million listings available for sale. So we have record-high demand and record-low supply to start the year. How that plays out in the sales and price data will depend on how many homes become available to buy in the months ahead. Ideally, we’d like for households to be able to find and acquire the homes that best suit their needs and for housing to remain affordable, but the fact is we’re facing a major supply problem in 2021.”

The number of newly listed homes climbed by 3.4% in December, led by more new listings in the GTA and B.C. Lower Mainland, the same parts of Canada that saw the biggest sales gains in December.

With sales up by more than new supply in December, the national sales-to-new listings ratio tightened to 77.4% – among the highest levels on record for the measure. The long-term average for the national sales-to-new listings ratio is 54.2%.

Based on a comparison of sales-to-new listings ratio with long-term averages, only about 30% of all local markets were in balanced market territory in December, measured as being within one standard deviation of their long-term average. The other 70% of markets were above long-term norms, in many cases well above.

There were just 2.1 months of inventory on a national basis at the end of December 2020 – the lowest reading on record for this measure. At the local market level, 29 Ontario markets were under one month of inventory at the end of December.

Canadian Jobs Market Tanks in December.

Canadian employment fell 62,600 last month, a bit weaker than expected, following seven months of recovery (see chart below). The rapid rise in COVID cases and the ensuing lockdown measures in many key regions caused the net loss in jobs in the mid-December survey.  Especially hard hit were workers at restaurants and hotels who suffered a hefty 56,700 employment loss.

The jobless rate rose a tick to 8.6%–well below the peak of 13.7% in April–but still three percentage points above its pre-pandemic level.

However, there were some bright spots as several sectors churned out small gains (see second chart below).  Among them were finance, insurance and real estate, as well as scientific and tech services. Manufacturing rose 15,400, and public administration reported solid gains.

On a positive note, full-time jobs actually rose 36,500, and average wages pushed back up and are now 5.6% higher than one year ago. This outsized gain, in part, reflects the loss in so many low-wage jobs.

Part-time jobs were down sharply in December, led by losses among workers aged 24 and under and those aged 55 and older. Also, the number of self-employed workers fell by 62,000, its lowest point since the pandemic began.

The December loss of jobs left employment down 571,600 (or -3.0%) from year-ago levels, the deepest annual decline since 1982–but far better than the April reading of -15% y/y. The 2020 job loss in Canada of -3.0% is also a relatively mild downturn compared to today’s US job market release for December, which reported a -6.2% y/y drop in employment. In Canada, the 332,300 y/y loss in accommodation and food services employment alone accounted for 58% of our annual job loss.

Employment was down in nine out of ten provinces last month. The lucky exception was British Columbia. None of the provinces stood out on the low side. The table below shows the unemployment rate by province. Jobless rates rise and fall with labour force participation rates. You are not considered unemployed if you are not seeking work. The number of people counted as either employed or unemployed dropped by 42,000 (-0.2%) in December, the first significant decline since April. Core-aged women and young males were largely responsible for the fall.

Bottom Line 

It certainly doesn’t appear that the lockdowns will be lifted anytime soon. We keep hitting new records in the number of Covid cases, and the more contagious Covid variant is upon us. What’s more, the rollout of the vaccine has been disturbingly slow. So until winter is behind us, there is unlikely to be a meaningful opening of the economy. All things considered, Canada’s economy has been relatively resilient. That’s not surprising given the government income support–the most generous in the G7 countries. Moreover, financial conditions are extremely accommodative.

Although no one is coming through the pandemic unscathed, most of the employment losses have been lower-paying jobs. Many higher-income earners continue to work from home. And even though the pandemic is worsening, many of Canada’s housing markets recorded their strongest December ever. Rock-bottom interest rates, high household savings and changing housing needs turned 2020 into a spectacular year for housing activity.

According to local real estate boards, December resales were surprisingly strong for what is typically a quiet month. Existing home sales surged between 32% y/y in Montreal, Ottawa and Edmonton and 65% y/y in Toronto based on early results. More distant suburbs attracted many families looking for more space with less concern about long commutes when jobs can be conducted at home. Property values continued to appreciate at accelerating rates in most markets. Downtown condo prices still bucked the trend due to ample inventories in Canada’s largest cities—the downturn in the rental market has prompted many condo investors to sell. That said, softer condo prices are now drawing more buyers in. Existing condo sales soared virtually everywhere in December.

Housing is likely to continue to cushion the blow of the pandemic on the overall economy. And while not everyone is sharing in this windfall, it will ultimately help pave the way to better employment gains in the spring.

However, no question that the bright light at the end of the very dark pandemic tunnel is a widely dispersed vaccine. PM Trudeau reasserted this week that the vaccine will be available to all who want it by September 2021. At the pace, it is now getting into people’s arms, that will not happen. Just over 0.6% of Canada’s population was vaccinated as of Thursday, January 7. By comparison, the US had vaccinated 1.8% of its population by that date, and Israel had inoculated nearly 20%, according to Our World in Data, a nonprofit research project at the University of Oxford. The U.K. had vaccinated about 1.9% of its population by Jan. 3, the latest date for which vaccination numbers were available (see the chart below).

–Dr. Sherry Cooper

Now that the page has finally been turned on 2020, we wanted to take a look back at how mortgage rates fared over the course of what was a tumultuous year.

It’s safe to say that COVID-19 stole the show in terms of the year’s biggest newsmaker. On the mortgage front, one of the biggest themes of the year ended up being the downward trend in interest rates to historic lows. Not to mention a resilient housing market that not only held its ground in the face of a global pandemic, but one that continued to produce record-high house prices.

Here’s an overview of some of the year’s top stories, rate movements and mortgage-related stocks.

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Top Mortgage Stories of 2020

COVID-19 and Mortgage Deferrals

The COVID-19 pandemic was indisputably the largest event of 2020, and one with far-reaching effects. One of the key reasons Canada’s housing and mortgage markets held up so well is thanks to the Herculean and unprecedented response from the country’s mortgage lenders, including the mortgage deferral options offered by most of them.

At the height of the program, nearly 800,000 mortgages were in deferral. By December, the far majority of those mortgage holders have successfully transitioned back to making their regular payments. It’s clear that without this coordinated mortgage payment relief, far more homeowners would likely have defaulted on their payments, leading to more severe personal and economic consequences.

Bank of Canada’s COVID Response

The Bank of Canada’s role in keeping the country’s financial system liquid and maintaining confidence throughout the year can’t go unrecognized. The Bank’s Governing Council dropped the key lending rate from 1.75% in February to just 0.25% by the end of March. Over the course of the year the Bank bought up tens of billions of dollars in government bonds. By the end of October, the Bank had acquired $156 billion worth of bonds, according to Governor Tiff Macklem—or about 32% of the bond market. At the current pace, the central bank is expected to control more than half of the country’s bond market by the end of next year, according to estimates by CIBC’s Ian Pollick.

Mortgage Rates Reach Historic Lows

One very important impact for homebuyers was the steady downward decline in mortgage rates over the course of the year. Not only did mortgage rates end the year lower from where they started the year, they reached all-time lows, with rates for most terms falling below 2.00%. And in December, HSBC unveiled the lowest mortgage rate in Canadian history, a 5-year high-ratio insured variable rate of 0.99%.

Unstoppable Real Estate Market

Despite a plunge in home sales and a dip in home prices in the early days of the pandemic, the real estate market quickly regained its footing and by the fall was once again posting fresh price highs.

As of November, the Canadian Real Estate Association reported an average sale price of $603,000 (up 13.8% from 2020), or $481,000 (+19%) after removing the high-priced markets of Toronto and Vancouver. With housing supply ending the year at a record low, prices are expected to maintain upward momentum, albeit at a more moderate pace, according to forecasts.

This Year’s Top Deals & Lender Moves

DLC Merger with Founders Advantage

Genworth Acquired by Brookfield, Renamed to Sagen MI

CMHC’s Rule Changes

Finastra Purchases Doorr

Lendesk Acquires Finmo

Rate Movement

The foundation for Canadian interest rates is the overnight rate. It ended the year down significantly from where it began at the start of the year. Meanwhile, the most important benchmark for fixed-rate pricing—the 5-year government bond—ended the year down 130 basis points.

Stock Moves

And finally, here’s a look at the performance of Canada’s big banks along with the public companies that make the majority of their revenue in the mortgage business.

¹ Discounted mortgage rates reflect the average advertised rates of Canada’s top super brokers, as of December 31.

–Steve Huebl