Why Are Canadians More Confident in the Housing Market Than the Economy?

Housing Versus Economy

Everyone knows that the Canadian economy took a major hit as a result of the ongoing COVID-19 pandemic with job losses across multiple sectors, but this wasn’t the case for the Canadian real estate market.

A recent RBC Home Buying Sentiment poll revealed that Canadians feel more confident about the housing market than the overall economy. This is both interesting and fairly consistent with market realities as Statistics Canada estimated that the Canadian economy posted its largest GDP drop on record in 2020 by about 5%. Not only that, but economic activity was hovering 3% below pre-pandemic levels.

The RBC poll provides insight into Canadian home buying sentiments, which found that only 18% of Canadians felt that the economy was strong. This should not come as a surprise because the pandemic has forced many businesses to close and placed a lot of workers without a job.

The RBC poll shows that when it comes to housing, 45% believe in the strength of the real estate market, even though most respondents (78%) had concerns about the overall financial impacts of COVID-19. The data also revealed that less than half of respondents polled (43%) were concerned about any negative effects from future waves of the pandemic on the real estate market.

RBC Poll Economy Vs Housing

What’s also telling from the poll results is that more than half of respondents felt that home values within their area were unaffordable (59%) with an average budget of $445,237, which is below the average nationwide home price value. 

So it appears that even though home prices are viewed as “unaffordable” in the eyes of Canadians, they still place more confidence in the housing market than the overall economy.

"Many Canadians continue to be financially resilient in the face of the pandemic, and this has carried over into the real estate market. Seen as a pillar of stability, Canadians continue to view home ownership as a worthwhile pursuit and are willing to shift their priorities in order to find affordable property within their budget,” said Amit Sahasrabudhe, Vice-President, Home Equity Financing, Products and Acquisitions, RBC.

And when Canadians were asked if they thought home ownership was a good investment, the vast majority (80%) said yes. So while most people would agree that we are facing one of the worst social and economic challenges of our generation (79%), more than half of respondents believed that home values are only going to increase in the immediate future (52%).

Is Home Ownership a Good Investment?

The good news from this RBC poll is that it revealed that most respondents did not feel the pandemic has put them in a worse financial situation compared to the pre-pandemic time period (59%). 

"Despite the pandemic, Canadians continue to remain optimistic when it comes to the future and their finances," asserted Sahasrabudhe. 

"Many Canadians remain confident in their ability to save and continue to aspire to make their dream of owning a home a reality."

Economy Takes a Hit: Mass Layoffs and Business Closures

In the month of January 2021 alone, Canada lost 213,000 jobs as a result of lockdowns that added more economic stress. This recent statistic means that Canada now has almost 1 million (858,000) fewer jobs than it did back in February of last year, prior to the COVID-19 pandemic onset.

And when we look at real GDP data from 2020 we can see that it shrank 5.4%, which was the biggest annual decline since quarterly data was initially recorded back in 1961.

What we witnessed in 2020 and even continuing into 2021 is a trend where dozens of major employers within the airline, retail, consumer, and energy sectors have had to cut their workforces in order to stay afloat. 

Even Air Canada recently announced that they were cutting about 1,700 jobs in order to continue operating in a Covid-19 environment. Air Canada posted a staggering $1.16 billion loss during the fourth quarter of 2020, which isn’t surprising considering ongoing travel restrictions that have seen a reduction in air travel across Canada and beyond.

Canadians are aware of these job cuts and rising unemployment rates, which is why it shouldn’t be alarming that Canadians are not feeling very confident about the overall stability of the Canadian economy.

The data also shows us that the lowest paid Canadians took the hardest hit in terms of job losses. Canada’s lowest paid wage earners have continued to directly feel the effects of the pandemic because they are the ones working in the retail and consumer sectors that have faced large job cuts compared to other sectors.

Canadian Economy More Dependent on Real Estate

While it is evident that ordinary Canadians feel more favourably towards real estate than the economy, this is also true for the country as a whole as the economy is now more dependent on real estate for growth.

Recent data from Statistics Canada showed that residential investment soared to record highs in Q4 2020. Investment in residential construction was up 1.9% in December to $11.1 billion. 

The total investment value within building construction increased 0.3% to $46.2 billion in Q4 2020, which was driven by a 5% gain in the residential sector. Also, investment in residential buildings had a record quarter with both single-unit and multi-unit investments posting a 7.9% and 2.2% positive gain respectively.

There were a total of eight provinces that posted strong gains, with Ontario (+2.8%), Quebec (+3.1%) and Alberta (+4.6%) making up the majority of the growth.

This residential investment data shows us real estate’s direct contribution to the Canadian GDP, which includes construction, major renovations, and ownership transfer fees.

New residential construction represents the largest share of gross fixed capital formation in residential structures, which includes construction within single-family and semi-detached homes, row houses, apartments, condominiums, cottages, and mobile homes. 

Essentially, new residential construction includes all costs related to the construction and sale or purchase of a building. Renovations are the second-largest category and include alterations or improvements made to a property. And the third category, ownership transfer costs, include all costs related to the transfer of a residential asset from one owner to another, such as real estate commissions, land transfer taxes, legal costs, and file review costs.

What this overall growth shows us is that the rate of growth for residential investments have far outpaced economic growth. And, as a result, residential investment now represents the largest percent of GDP than ever before.

Canada’s residential real estate sector now accounts for just over 9% of the country’s overall economic output in terms of GDP. But, the Bank of Canada Governor Tiff Macklem isn’t too concerned about this fundamental market shift that is leaning on housing for growth.

According to data compiled from Statistics Canada, gross residential investment increased to an unprecedented level of $165.9 billion in the fourth quarter of 2020, which is about 12% more than the previous quarterly record of $147.5 billion back in Q4 2017.

Gross Canadian Residential Investment

Message For Investors

Real estate investors reading this information should take comfort knowing that housing is an asset that is viewed as a pillar of stability for the Canadian economy. The RBC poll shows us that even though the Canadian economy took a major hit as a result of the ongoing pandemic, the housing market was relatively resilient throughout the entire process. 

Pandemics will come and go, but one thing that will remain is demand for real estate. Everyone needs a place to live, whether that is buying or renting a property across the GTA. And while the GTA condo market itself has faced its challenges in 2020 during the pandemic, we are starting to see a strong demand return to the condo market in the first half of 2021.

Prices for new condos are still quite low, and so there are a lot of options out there for new and seasoned investors, as opposed to the detached market where there are multiple offers for homes that are well over the asking price.

Investors interested in purchasing a condo in the GTA should examine their finances and work within a budget that works for their specific needs. We’ve recently seen the low-rise segment take off with double-digit increases in year-over-year appreciation rates, which is a good sign for the condo market. Soaring low-rise house prices will likely see a strong demand return to the condo market as many buyers are priced out of the single-family home segment.

As the market begins to “return to normal” with more people being vaccinated, it will only be a matter of time when we see a return of immigration back into the country with the vast majority of those immigrants settling in the GTA. The opening up of borders will also see a large influx of international students returning to the city where rental housing options will be in high demand.

Good news is on the horizon for condo investors, so feel confident and build your long-term real estate investment goals accordingly.