Why did Canadian home prices go up during the pandemic, especially when immigration basically went to zero? (Canada only met our target of 400,000 immigrants for 2021 by counting people who were already here.)
When Covid hit, spending on gas, shopping, restaurants, and travel plunged, and household savings went way up. A lot of people who could work from home and still had their jobs suddenly had a lot more money to invest, and some of that money went into real estate.
Visualization, based on Statistics Canada data, is by Philip Smith.
I would say the roughly top 30 per cent of the population, income-wise, did well financially during the pandemic. Think of all the things that you couldn’t spend money on. You can’t go on vacation, you’re not commuting to work, so that’s $60 to $80 a week that’s not going into the gas tank. That starts to add up. Savings rates shot up.
Because of this, we saw that 30 per cent of the population put their money in all kinds of things. So real estate was a big one, but Bitcoin went up. All these “meme stocks” from GameStop to AMC went up. Old hockey cards absolutely escalated in value. Because you have all these people with essentially too much money and too much free time on their hands, and they’re kind of bored, they need to park that money somewhere. And a whole bunch of them decided, “Hey, you know what, I’m gonna buy a place in cottage country” or “I’m gonna buy this second house; I’m gonna get into the real-estate market.” So that drove a lot of this — there were more people buying and selling. And they could make much bigger offers because of savings rates and low interest rates.
Of course a lot of people did lose their jobs, which is why CERB and other income-support programs were so important - like a super-sized version of EI. Having household income drop to match the plunge in spending would have been disastrous. But now that there's been this giant surge in savings, pushing up real estate prices, what do we need to do to make home ownership more affordable?
On the supply side, what we want is something more like Atlanta, where demand for housing leads to a lot more construction and flat prices, rather than San Francisco, where demand for housing results in high prices while construction stays flat. See the graph from Glaeser and Gyourko 2018. People move where the jobs are, and Covid has untethered a lot of jobs from expensive cities like Toronto and Vancouver, so it makes sense to build more housing where people have moved, for example by allowing more "missing-middle" housing. This won't necessarily be easy: municipal governments are wary of adding more housing (because of opposition from local homeowners concerned about anything that could affect their most valuable asset), and provincial governments have the power to override them but are reluctant to do so.
On the demand side, the risk is that you get a "natural Ponzi scheme" (Robert Shiller), like in the pre-2008 housing crash in the US, where an initial rise in house prices leads to more and more people piling into the market and driving prices up further. In normal times, the price-to-rent ratio should be stable. The higher it goes, the more unsustainable prices become. To counteract this, you probably want to tighten credit, for example by requiring higher down payments (a lower loan-to-value ratio) for investment properties.