Modern apartment buildings in a green residential area in the city

The housing market will emerge from the Covid-19 recovery damaged, with a weaker labour market and other economic factors creating challenges over the coming 12 to 18 months, says a report from CIBC Economics.

“In the coming few quarters, housing activity will dance to the volatile tune of economic activity,” wrote Benjamin Tal and Katherine Judge, authors of the report.

The Bank of Canada’s efforts to lower borrowing costs and create liquidity are bringing mortgage rates down, they wrote, “but the cost of borrowing is always secondary in an environment of low confidence, increased unemployment, and slower income growth.”

Government shutdowns have “basically frozen” the retail market, with Toronto sales down 69% year over year as of the first few weeks of April, and new listings down 64%.

Even as the economy starts to return to normal next year, the housing market will face downward pressure on prices. A softer labour market and weaker investment activity will reduce demand, and forced sales will add to supply, likely offsetting the impact of fewer new units, the report said.

“Overall, as the fog clears, we expect to see average prices 5%–10% lower relative to 2019 levels, with high-cost units in the high-rise segment of the market seeing the most notable price declines.”

Housing starts are expected to fall from more than 200,000, annualized, before the crisis, to around 70,000 in the second quarter, rebounding “with some luck” to 100,000 in Q3.

Canadians’ high levels of household debt will add to the shock from job losses and lead to more mortgages in arrears, the report said. Mortgage payment deferrals will push the deterioration to next year.

“By 2021, however, as the unemployment rate stabilizes at north of 8%, we expect to see the arrears rate rise to just below 0.4%,” the report said.

Read the full report here.