Will Pent-Up Savings Contribute to the Canadian Housing Market?

Historically, recessions have significantly hemorrhaged Canadians’ savings accounts. Last year, the Great White North slipped into a coronavirus-induced technical recession, going through one of the worst and steepest – but also briefest – financial crises on record. Millions were out of work, businesses shut down, and international commerce came to a halt. Even as much of the developed world moves on from the COVID-19 pandemic, economies worldwide are still reeling from widespread impacts of this public health crisis. But was it all bad news in 2020? The year of the coronavirus saw positive growth in the Canadian housing market, employees gained the flexibility to work from home, and household savings rates soared to record highs. It is estimated that Canadians accumulated excess savings of approximately $150 billion, and the various polls suggest that consumers want to continue saving.

After a year of staying inside and curbing spending habits, could consumers refrain from touching this pile of money? Depending on the total dollar amount people have saved, pent-up savings could alleviate the pent-up demand in the housing market, particularly as more Canadians return to various aspects of the economy, whether it is the housing sector or labor force.

Will Pent-Up Savings Contribute to the Canadian Housing Market?

The consensus is that the Canadian real estate market is going through an affordability crisis.

According to the Canadian Real Estate Association (CREA), the MLS® Home Price Index (HPI) – which is considered a more accurate measurement than average and median prices – rose 2.4 per cent month-over-month to top $700,000 in April. This is a 23.1 per cent increase from the same time a year ago.

As home prices continue to go up, the down payment families need to purchase a home only increases, applying greater pressure on young homebuyers. Under current federal rules and regulations, if the purchase price of a property is between $500,000 and $999,999, the minimum down payment is five per cent on the first $500,000 and ten per cent of any amount over $500,000.

A new study from the National Bank of Canada (NBC) found that the median household in Canada’s urban centres would require 7.52 years to save the minimum in the first quarter of this year. In Vancouver, Canadians would need up to 32 years to tuck away enough money for a down payment on a non-condo residence, while a detached or semi-detached home in Winnipeg would need a little more than two years of savings to afford a down payment.

NBC’s same study reported that only the nation’s top five per cent of households would qualify for a mortgage. The minimum qualifying household income to carry the payments on the average Canadian home was about $131,000, or $164,000 for a non-condominium. Interestingly, this finding is an aggregate of large cities in the nation, not only Vancouver or Toronto.

The pandemic influenced a sting of lifestyle changes that impacted how Canadians spend their hard earned dollars; many pivoted to making coffee at home, allowed professionals to save on transportation, and prompted retail-hungry consumers to avoid temptation at the local mall. Suffice to say, if Canadians took advantage of the lockdowns to save more loonies and toonies, this money could be added to their down payment fund. Although historically low interest rates may have prevented consumers from building on these savings, the cash injection may bring hopeful homebuyers closer to achieving the Canadian dream.

Paying Off Debt with Savings Boost?

Last year, mortgage debt climbed by $118 billion, about double from the previous year. With many forecasts suggesting that the boom in the Canadian real estate market has peaked, industry experts recommend homebuyers and homeowners to stay in their new properties because speculative activity will not pay off as much as it did in 2020.

The Royal Bank of Canada recently wrote in a report that this debt is manageable, even in this shaky economy, alluding to low interest rates and payment deferrals for about three million borrowers. Surprisingly, Canada’s household debt (consumer and mortgage debt) service ratio (total debt payments as a percentage of after-tax household income) has fallen to around 13 per cent, down from a peak of about 15 per cent.

These are important numbers because they suggest that Canadians could be allocating their pent-up savings to their debts, whether it is mortgage debt or credit cards. Ultimately, Canadians will consume this money for a down payment on a home or pay off their mortgages.

Canadian Housing Market Moderated in April?

The positive news for young homebuyers who missed out on the boom is that the Canadian real estate market moderated in April. Home sales tumbled 12.5 per cent month-over-month last month.

Although prices and sales are at all-time highs, the nation’s red-hot market could have reached a breaking point. Mortgage pre-approvals are at record-low rates, the Bank of Canada (BoC) has turned hawkish, vaccines are being rolled out successfully, and, perhaps the most important of all, buyer fatigue is surfacing.

Whether the housing market is in store for a downturn or the momentum of the past year is slowing down, this could be good news for homebuyers who wish to use their accrued savings for a down payment. For all the talk of pent-up demand in the months following the first wave of the coronavirus pandemic, the conversation may now pivot to the subject of pent-up savings. Only time will tell if this money will be used for housing, debt, or consumer spending.