Red alert

The shape of the housing market’s recovery isn’t open to debate: hands-down, it’s been V-shaped, indicating a strong bouceback. But outsized sales activity and record-high prices likely aren’t sustainable, said a report from TD Economics on Thursday.

Since their lows at the start of the pandemic, housing sales were up “an astronomical” 230% through August, the report said.

TD estimated that Canadian home sales beat their previous record by 20% in Q3, as every province recorded a “massive” comeback in sales.

The strong performance can be attributed to factors such as pent-up demand as the pandemic began and low interest rates, the report said.

In step, home prices increased, with the average price hitting a record high of just over $600,000 in August.

Every province saw positive annual price growth in the month, the report said, with six of 10 posting double-digit advances.

Surging sales are one reason for rising prices, but there are others as well, including a shift in what types of homes are being bought and sold.

A shift occurred — potentially motivated by the pandemic — away from condos toward larger, more expensive units like single-detached housing.

“This shift may be taking place in order to afford additional space for those who work from home, or to escape the density (and Covid-19 risk) of condos,” the report said.

Whether the trend to detached housing will continue is unclear, because factors other than those related to the pandemic could also be at play.

For example, with condo prices appreciating at a stronger rate than single-detached homes in recent years in markets like Toronto and Vancouver, condo owners have equity to trade up to detached housing, the report said.

TD also noted that once a vaccine for Covid-19 is available, condos may outperform, “as they represent the most affordable window into homeownership (particularly as the detached market remains chronically undersupplied) and the attraction of big-city living resumes.”

What’s clear is that strength in the resale market isn’t likely to persist, because economic fundamentals aren’t supportive.

“A wide disconnect between housing, the economy and/or job markets doesn’t tend to be sustained,” the report said. “[I]t’s more likely that housing moderates than [that] job fundamentals improve sharply from here, given the lasting impacts of the pandemic.”

That moderation will occur over the next couple of quarters, TD forecast.

Longer term, through 2022, the pace of sales is expected to be weighed down by such factors as slower population growth and a modest increase in bond yields as the economy recovers.

Prices will also eventually pull back, though the current quarter could still see some increases.

TD forecast that prices will drop by about 7% through the first half of 2021 before “regaining some traction.” Declines will likely be larger in the oil-producing provinces where mortgage deferrals have been relatively high.

Despite the drop, the upward trend in prices established prior to the pandemic would remain in place, the report said.

For full details, read the TD Economics housing update.