In a recent analytical note, economists from the Bank of Canada focused on housing market imbalances and household indebtedness. Here are the analysis highlights:
Prior to the COVID-19 health crisis, the Canadian economy was facing two significant financial vulnerabilities: imbalances in the housing market and elevated household indebtedness. The fiscal measures introduced at the start of the pandemic, such as direct income support and payment deferrals, helped the national economy navigate the macroeconomic risks arising from a combination of these vulnerabilities and the economic shock of the crisis.
However, current data suggests that these vulnerabilities have likely been exacerbated due to the increased activity in the real estate market. Sales hit record levels during the pandemic resulting in nationwide housing inventories dropping from 4.2 months of sales in January 2020 to 1.9 months in January 2021.
The rise in home prices accelerated nationally, particularly in the Ottawa, Montreal, and Moncton markets where the year-over-year percentage change in the home price index reached 19.9 per cent in February 2021.
There has been a shift in housing preferences with an increased interest in single-family homes rather than condominiums. Location preferences have also changed, resulting in house prices growing more rapidly in areas farther away from the downtown areas of major Canadian cities.
Unusual activity in the residential resale market has increased the prevalence of overbidding, particularly in the Greater Toronto Area, where 67 per cent of homes sold for more than the asking price in January 2021.
While household consumer credit has declined since March 2020, total indebtedness continues to grow due to a 6.8 per cent increase in residential mortgage credit. This increase in credit also affects mortgages granted to heavily indebted households (loan-to-income ratio above 450 per cent), leaving them vulnerable to an interest rate hike.