Update on housing market imbalances and household indebtedness

At the start of the COVID‑19 pandemic, Canada was facing two significant and interrelated financial vulnerabilities: imbalances in the housing market and elevated household indebtedness. These two vulnerabilities had the potential to amplify the devastating economic impacts of the pandemic and create additional stress across the Canadian financial system. But with the help of unprecedented policy measures—including direct income support and debt payment deferrals—this risk has so far been avoided.

Strength in the housing market is contributing to Canada’s economic recovery from the pandemic. But it may also be intensifying housing market imbalances and household indebtedness.

The evidence presented here generally suggests these vulnerabilities have increased in recent months. In particular, house price growth and mortgage indebtedness have risen amid an increasingly strong housing market. The Bank of Canada will continue to monitor these developments closely and will provide further updates in the next Financial System Review to be published in May 2021.

Housing market imbalances

Housing market activity has reached record levels

Activity in the housing market has been exceptionally strong during the pandemic. An initial rebound reflected pent-up demand following the lockdown in the spring of 2020, but momentum continues to build.

  • As of February 2021, national resales were at record highs while inventory levels reached record lows (Chart 1).

Chart 1: Housing resales are at record highs and inventory levels at record lows

Source: Canadian Real Estate Association Last observation: February 2021

Growth in house prices has picked up

The ratio of sales to new listings suggests that the housing market is exceptionally tight.

  • National year-over-year growth in house prices reached 17 percent in February 2021—nearly three times the pace seen just before the pandemic (Chart 2).
  • The rise in house prices over the past year has been broad-based across the country (Chart 3). House prices have risen most in Ottawa, Montréal and Moncton, cities where price growth was solid before the pandemic and has since strengthened further.

Chart 2: House price growth has picked up substantially amid tight market conditions

Sources: Canadian Real Estate Association and Bank of Canada calculations Last observation: February 2021

Chart 3: House prices have risen across Canada during the pandemic

Sources: Canadian Real Estate Association and Bank of Canada calculations Last observation: February 2021

Demand for housing is robust despite the pandemic

Compared with a typical recession, the pandemic has had a very different impact on housing demand. For example, the upper end of the income distribution—where the majority of homebuyers are found—has seen little disruption during the pandemic.1 This, combined with record-low mortgage rates, has resulted in relatively strong demand despite the broader economic downturn and a decline in population growth.

Preferences have changed

Housing preferences have shifted markedly. As buyers seek more space, demand has moved away from condominiums toward single-family homes. In many regions, this has:

  • aggravated the existing imbalance of demand and supply of single-family homes
  • resulted in rapid price growth for single-family homes (Chart 4)
  • not been offset by price decreases in the condominium market, where prices are still close to where they were a year ago

Location preferences have also changed. Homebuyers now appear to favour suburban and rural areas, partly as a result of the shift to remote work. Consequently, house prices have grown more rapidly in those areas (Chart 5). At present, it is difficult to gauge how long these shifts in preferences will last after the pandemic recedes.

Chart 4: The pandemic has caused a shift in housing preferences toward single-family homes

Sources: Canadian Real Estate Association and Bank of Canada calculations Last observation: February 2021

Chart 5: House prices have grown more rapidly in areas farther away from city centres

Note: Observations represent individual forward sortation areas. The dotted lines are trendlines that illustrate the average relationship in each city between house price growth and distance from city centre.
Sources: Teranet and Bank of Canada calculations Last observation: 2020Q4

There are signs of rising exuberance in some markets

Together, strong demand fundamentals and limited supply are contributing to rapid house price growth. In assessing housing market imbalances, the Bank will continue to monitor data closely for signs of speculative activity or self-reinforcing price increases.

The Bank’s Canadian Survey of Consumer Expectations has revealed that:

  • expectations of future increases in house prices have risen in the past few quarters and are now higher than they were before the pandemic (Chart 6)
  • these mounting expectations are more broad-based across provinces than in 2016–17

Data for the Greater Toronto Area show that roughly two-thirds of homes sold for more than the listing price in February 2021 (Chart 7). This is notably higher than levels seen just before the pandemic and is close to the previous peak.

Chart 6: House price expectations fell at the onset of the pandemic but have since recovered

Note: Expectations are measured by the interpolated median of expected growth in local house prices over the next 12 months for residents of Ontario and British Columbia. See M. Khan and T. Webley, "Disentangling the Factors Driving Housing Resales," Bank of Canada Staff Analytical Note No. 2019-12.
Source: Bank of Canada Last observation: 2021Q1

Chart 7: Some measures show rising exuberance in the housing market for the Greater Toronto Area

Source: Realosophy Realty Inc. Last observation: February 2021

Elevated household indebtedness

Households are accumulating more debt

Since the onset of the pandemic, the outstanding stock of household debt has risen by close to 3½ percent. This reflects an increase in mortgage debt (Chart 8), despite a pause in the first half of 2020.2

Chart 8: Growing mortgage credit is leading to a rise in total household debt

Sources: TransUnion and Bank of Canada calculations Last observation: January 2021

Consumer debt is decreasing

In contrast, consumer debt has declined since February 2020, with a sharp reduction in the use of revolving products such as credit cards and lines of credit.

  • Accelerated paying down of consumer debt is most pronounced among borrowers with low credit scores (Chart 9). These borrowers tend to carry large balances relative to their credit limits, so this reduction of debt seen in recent months is a positive development.

Chart 9: Credit card payments have notably increased among borrowers with low credit scores

Note: Payments are calculated as the share of outstanding balances paid off each month. “Above prime” consumers have credit scores greater than 780; “prime” consumers have credit scores between 700 and 780; and “below prime” consumers have credit scores less than 700.
Sources: TransUnion and Bank of Canada calculationsLast observation: January 2021

Mortgage credit is growing rapidly

Mortgage credit accounts for the majority of household debt. It has:

  • continued to grow rapidly over the past year
  • accelerated in the second half of 2020

The rapid growth in mortgage debt is linked to the elevated levels of housing activity and related house price growth.

New mortgages to highly indebted households are on the rise

  • The share of newly issued mortgages with loan-to-income (LTI) ratios above 450 percent has risen substantially (Chart 10). This returns the share of high-LTI mortgages to the range seen just before the introduction of the revised Guideline B-20.
  • Debt-service ratios (DSRs) of new mortgages have fallen modestly over the past year, as the decline in mortgage rates to all-time lows has more than offset higher LTI ratios. Despite the currently low mortgage rates, highly indebted households remain vulnerable. For instance, mortgage DSRs based on the qualifying interest rate used to stress-test new mortgages have slightly increased.

Chart 10: The proportion of new mortgages with high loan-to-income ratios is trending up

Note: Data include purchases and refinancing originated by federally regulated financial institutions. High-ratio mortgages have a loan-to-value ratio greater than 80 percent and must be insured. Low-ratio mortgages have a loan-to-value ratio of 80 percent or less.
Sources: Department of Finance Canada, regulatory filings of Canadian banks and Bank of Canada calculations Last observation: 2020Q4

  1. 1. Typically, more than half of homebuyers in Canada have household incomes above $100,000.[]
  2. 2. The behaviour of household debt since the beginning of the pandemic is not at odds with the increase in household savings over this period. Households have used some of their savings to pay down consumer debt, while also accumulating additional mortgage debt. New mortgage debt does not necessarily reduce the savings rate because it involves the purchase of an asset. For more information on the increase in household savings during the pandemic, see L. Schembri, “COVID‑19, savings and household spending” (speech to Restaurants Canada, Toronto (via webcast), March 11, 2021).[]

Disclaimer

Bank of Canada staff analytical notes are short articles that focus on topical issues relevant to the current economic and financial context, produced independently from the Bank’s Governing Council. This work may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this note are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.