The housing market across Canada has been on a 16-month tear that could be considered overly exuberant, but has this left it on a crash course? I don’t think so, judging by the 2021 half-time housing data.
Let’s start with my hometown of Ottawa.
The Ottawa Real Estate Board reported earlier this past month 2,131 residential properties changed hands through its MLS system. That represents an increase of five per cent from June 2020 but it’s also the lowest monthly total since February. March, April and May were all stronger months than June.
Year-to-date sales, however, are still up by 48 per cent from the first half of 2020. The average selling price in June, at $725,970, was a significant 26 per cent higher than a year ago.
Nationally, the Canadian Real Estate Association reported last week the “housing market continues to moderate in June,” again, after peaking in March. The total number of sales across the country was down by 8.4 per cent from May, but still up by 13.6 per cent from a year ago.
Supply shortage remains
“While there is still a lot of activity in many housing markets across Canada, things have noticeably calmed down in the last few months,” Cliff Stevenson, chair of CREA, said in the release. “There remains a shortage of supply in many parts of the country, but at least there isn’t the same level of competition among buyers we were seeing a few months ago.”
But, let’s put this in greater historic context. It’s a normal seasonal pattern for home resale activity to peak sometime in the spring, level off and even ease back somewhat through the summer and fall, and then bottom out for the year, usually in December or January.
I have charted home resale activity in Ottawa going back to 1979. Looking at the past 12 years, since the 2008 recession, April, May or June has typically been the peak month in a year.
For 2021, it was March. June’s averages for Ottawa are about three per cent off the March high. The high-low range on selling prices for 2020 was about $96,000 and so far this year it’s been $89,000.
That this year’s peak for Ottawa (and Canada as a whole) has shifted back a couple of months is not big news. Market prices are still materially above those of last year in every month. Average prices remain at a higher level than one or two years ago.
In terms of the swing in monthly averages, the market is not behaving much differently than in other years.
The increases in housing market activity and selling prices in Ottawa and across the country through the pandemic are not unprecedented. The early ’80s also saw jumps in the vicinity of 20 per cent.
After a sedate annual increase of 3.42 per cent in 1981, Ottawa selling prices increased 9.53 per cent in ’82, 21.34 per cent in ’83 and 18.37 per cent in ’84, then tapered off to the four to seven per cent range, before hitting that limbo we saw in the ’90s (even then, declines in selling prices were modest, short-lived and soon reversed).
The chief differences between now and the early ’80s? Canada’s rate of inflation was far higher – those peak years of ’83 and ’84 coincided with sharp drops in a CPI that had been over 10 per cent. It was also a time of record-high interest/mortgage rates that were just beginning to ease.
The real issue – affordability
Regardless of the supply-demand pressures we have seen through the pandemic, inflation rates today remain tame compared to the early ’80s and the cost of borrowing remains dirt cheap.
The real issue with the current market situation isn’t so much the risk of an unstable bubble and then a crash, but rather the increased pressure this has placed on individuals of limited means, even average means, to afford a reasonable place to live. (See this recent story about bidding wars starting to impact the rental market and this one about the rural market outside of urban Ottawa.)
Sure, we have mortgage stress tests to help people avoid getting in over their heads, but these do little to help them find affordable housing in the first place.
Now, that’s not to say we haven’t seen concerns raised about inflation today and about the impact on consumer debt loads of any interest rate increases. It’s fair to assume that people have made purchase decisions over the past 16 months that they may come to regret.
This extends far beyond housing. People have been installing backyard pools and purchasing watercraft, RVs and other toys in record numbers. The rush on demand has strained supply and driven prices up accordingly.
Even something as simple as a new backyard deck has become a premium investment because of lumber shortages. (I can’t even get replacement plastic roller wheels for the rack in my dishwasher.) Much of this purchasing likely will have been done on credit.
We may see easing to varying degrees in housing markets across the country over the next year or so, though I’m doubtful of any pullback dramatic enough to qualify as a crash. But, we may very well see people liquidating those impulse purchases of boats, RVs and other indulgences in high numbers.
In a couple of years, great deals may be had for the patient buyer. Remember that old joke: “The two happiest days in a boat (or RV) owner’s life are the day he buys the vessel and the day he sells it.”
A slogan for the 2020s
The housing market, meanwhile, will continue to chug along, painfully reluctant, as history has shown us, to give up any of its gains. Let me finish with another telling mid-year statistic – new home construction from CMHC.
Construction began on 293,567 new housing units across the country in June, up about three per cent from May, demonstrating that the “level of activity remains elevated by historical standards.”
Time will tell if “elevated by historical standards” becomes the slogan of the 2020s.
To discuss this or any valuation topic in the context of your property, please contact me at [email protected]. I am always interested in your feedback and suggestions for future articles.