BCREA: ECONOMICS Market Intelligence
Five Questions for the Post-Pandemic Housing Market
The COVID-19 pandemic has had substantial and often counter-intuitive impacts on the BC economy and housing market. As we hopefully put the worst of the pandemic behind us and look ahead to a post-pandemic world, there remains significant uncertainty about what exactly that world is going to look like. In this Market Intelligence, we look at five questions for the post-pandemic BC housing market:
• How long until markets return to balance?
• Will demand for extra space persist post-pandemic?
• Is remote working here to stay?
• When might immigration normalize and what does that mean for housing?
• Will high inflation lead to a sharp rise in mortgage rates?
1. How long until markets return to balance?
There is perhaps nothing closer to an iron law in the housing market than the relationship between the sales-to-active listings ratio and home prices. When the ratio is very high, as it is now, prices are going to rise. This is shown in the monthly scatter plot relating changes in average price to the sales-to-active listings ratio trend over the past 20 years. The sales- to-active listings ratio can be high due to strong sales, low active listings or, as is the case now, a combination of both. However, low active listings have been a major contributor to rising prices for the past several years.
Even before the COVID-19 pandemic, housing markets all over the province had been operating at very low levels of inventory. Once the pandemic hit and potential sellers pulled listings or held off listing their homes for fear of viral spread, re-sale listings fell to crisis levels.
After a year of very strong price gains and vaccinations ramping up, new listings have accelerated, but inventories are a very long way from the healthy levels needed to reign in price growth. At a long-run average level of home sales, the province needs about 45,000 active listings to keep prices growing in line with inflation. At just 22,000 currently, there is a large deficit of listings that needs to be made up for. In fact, there is a significant listings gap in every market in the province, with some markets much more severe than others.
What is needed to bring markets back into balance? Some combination of continued strong listings activity and a moderation of sales from their current record pace to something more historically normal. While sales are showing some signs of cooling off, a strong economy, re-opening borders, massive household savings and very low mortgage rates will keep demand above normal for the next year. On the supply side, new listings in Metro Vancouver have trended higher and should continue to get a boost as the province surpasses key vaccination thresholds. However, smaller markets around the province, where inventories are lowest, have not seen the same recovery in new listings activity.
With strong sales prevailing over the next two years, our current projections suggest that balanced markets are still quite a ways off.
2. Will elevated demand for extra space persist post-pandemic?
One of the most significant trends arising from the pandemic is a shift in buyer preferences toward acquiring extra space. Homes have suddenly become a workplace, a school, an entertainment centre and a refuge, and buyers have been willing to pay a significant premium to accommodate those new and diverse needs. That demand for space has run headlong into a part of the market that is scarce on supply after a decade in which most development was focused on multi- family housing.
As a result, sales and prices of single-detached homes, especially in areas outside of major metropolitan markets, have skyrocketed. A key question for the post-pandemic market is whether this trend will persist. Much of the answer is based more on psychology than economics.
There is research showing that the effects of the pandemic may be long-lasting. For instance, in a small study of individuals who were quarantined during the Toronto SARS outbreak, participants described behavioral changes that lasted years following the end of the outbreak.
This could mean that the pandemic will have a lasting impact on the preferences of buyers and a continued desire for extra space and the safety, utility and flexibility that space provides. If so, that will continue to drive high demand for single-detached homes, and meeting that demand with sufficient supply, especially in larger cities, will be exceedingly difficult. As a result, high prices for single-family homes in all provincial markets may be quite persistent.
However, that depends to some degree on our third question for the post-pandemic market concerning remote work.