The Effect of COVID-19 on CMHC’s Housing Market Assessments

Concerns about long-term stability of the housing market

The third quarter Housing Market Assessment 2020 has been released.  In this report, we’re still concerned about the long-term stability of the housing market. With the unprecedented shock from COVID-19, we face risks not previously factored into the Housing Market Assessment framework. However, the HMA remains useful in thinking through the risks.

The framework uses several metrics to assess whether there were significant imbalances in the housing market. These metrics include: home prices, household income, mortgage rates, various housing market indicators such as vacancy rate, sale-to-listing ratios, etc.

We’ve seen imbalances before in the housing market

Canada experienced significant imbalances in the late 1980s and in 2008/2009. To detect such risks of instability, the Housing Market Assessment relies on:

• sound underlying data 
• the assumption that historical relationships between housing prices and fundamental drivers of housing markets have not changed substantially
• the fact that imbalances build up over time

Each of these has been affected by COVID-19.

COVID-19 has changed the way we do business in the short-term

In economic timelines, the shock from COVID-19 was instantaneous as governments moved to reduce face-to-face activity. Housing transactions disappeared almost overnight. The way we do business has changed. This made it difficult to evaluate whether prices were giving meaningful signals of what was happening in the housing market.

A particular concern in the Housing Market Assessment framework was that actions to reduce the spread of COVID-19 led to sharp income losses. Governments offset such losses through various policy measures to support income levels. This substitution of temporary income support makes us cautious that reported levels of disposable income can support the housing market.

We’re seeing many households with temporary income while home buying is based on long-term needs

Households make decisions on housing based on what they expect their expenditures and long-term income to be. It’s not based on short-term gains or losses. Households make decisions on permanent lifecycle income.

• Permanent, in the sense of not including transitory windfall gains.
• Lifecycle, meaning meeting the long-term needs of the household.

In the Housing Market Assessment framework, we look at income across Census Metropolitan Areas (CMAs). More of the income now recorded for CMAs is temporary. This doesn’t support the long-term housing market. Consider this:

• Disposable income forms the foundation of buying a home. 
• Temporary income supports are reported as disposable income.

What this means is that the level of long-term, permanent disposable income available to households, may be overstated. 

Q2 2020 overvaluation is likely underestimated

As a result, the level of overvaluation in the second quarter of 2020, in all regions across Canada is likely underestimated. Although reported disposable income may be high, some households may not feel confident in making long-term decisions on housing. Such confidence may fall as the pandemic moves into a second wave.

This risk is one of many reasons why CMHC remains concerned about the long-term stability of the housing market. Particularly at this time of heightened uncertainty and concern. Currently, there are significant short-term risks. However, as the economy recovers, traditional underlying economic relationships will reassert themselves, and value of the HMA will be restored.