The COVID-19 Pandemic has offered many lessons on the fragility of our society. Unemployment is spiking, small businesses are going out of business; and yet, the stock markets and housing prices suggest things have never been better. We know of course, this isn’t true. With the second wave of the pandemic sweeping the nation, why is it that housing prices continue to rise?

Back in March and April, when most of the country was under a complete lockdown, Evan Siddall, CEO of the Canadian Mortgage and Housing Corporation, warned housing prices could fall 9-18% as a result of the economic recession brought on by the pandemic. This prediction wasn’t popular at the time and was condemned by many in the industry, including financial institutions, including TD, who predicted a 6% jump.

Hindsight being 20/20, we now know that both of these predictions grossly under-estimated the effect the pandemic would end up having on the Canadian housing market. According to the Canadian Real Estate Association, the national average house price has jumped 17.5% since this time last year. And in Ontario, that figure is closer to 20% over the same time frame.

So how come a government run agency, with every resource at their disposal, got it so wrong? The reason is that we need to stop looking at housing as if it is tethered to the basic ingredients of the economy. Looking at household debt, average wages, and unemployment are not strong indicators of housing prices. Instead, looking at macro-economic policies that lead to historically low interest rates, and “cheap debt”, it becomes easier to understand why we’ve seen such a spike in the housing market.

A grim fact about recessions, and one learned in the United States in 2008, is that during times of economic downturn, it is the lower income brackets that are disproportionately affected. Those individuals already in the housing market are protected by the proportionate increase in the value of their own homes. When it comes time to refinance or buy new assets, it is the homeowners that are able to take advantage of lower interest rates and increase their purchasing power. The rich get richer, as the saying goes. The massive run-up in real estate, stocks, and bonds only benefit those that already own real estate, stocks, and bonds.

In addition, a by-product of the lowered mortgage rates by the Canadian Government is that we now know the Government will not let the housing market crash. Believe it or not, this could mean even lower mortgage rates forthcoming. According the Huffington Post, there is currently a built in Covid risk premium to protect lenders from future uncertainty. Without this risk premium, we could see rates drop even more. This, further contributing to the increase in housing prices.

So what does this mean big picture? It means that even though we are technically in an economic recession, it seems as though the housing market will continue to escalate independently of the economy. Homeowners will continue to see the stock of their home rising. And buyers, particularly first-time buyers, will likely continue to have their purchasing power diminished.

CREA stats taken from https://www.crea.ca/housing-market-stats/national-price-map/

Commentary on Huffington Post Article https://www.huffingtonpost.ca/entry/house-prices-quantitative-easing-government-spending_ca_5f9d9279c5b616c2f315323d