The COVID-19 outbreak has put the Canadian housing market "on pause” but concerns that it will trigger a larger correction are "overblown," according to a new Scotiabank Economics report.

It is clear that housing market activity has slowed dramatically, as the number of unemployed Canadians has risen sharply, but empirical data analysis indicates this decline will be temporary and only a very modest fall in prices might result from this crisis, says the report by Chief Economist Jean-François Perrault and René Lalonde, Director, Modelling and Forecasting.

"Moving into the second half of the year, the gradual resumption of economic activity, a return to work by large numbers of workers, and continued strength in population growth are expected to drive home sales and starts given that the housing market is still expected to be generally undersupplied.," they wrote in the report. 

The uptick in unemployment and a sharp decline in participation rate are expected to be key drivers of a roughly 40% decline in housing sales during the second quarter of 2020.

The COVID-related economic disruption has impacted factors that influence both demand and supply, the report says. Unemployment has risen, which dampens housing demand, but restrictions on non-essential business activities have reduced housing starts and listings have fallen as well.

While there are some uncertainties that can impact the outlook, Scotiabank Economics expects housing starts and sales to rebound by 12% in the third quarter of 2020, compared to the previous quarter. In the fourth quarter, housing starts and sales are expected to increase by 31% and 17%, respectively, compared to the previous quarter.

“COVID-19 is not expected to have a large or lasting impact on house prices. Our estimates suggest that prices will fall modestly by at most 4% in 2020 relative to 2019 as the decline in home sales is expected to largely track the decline in starts, so supply-demand dynamics will remain roughly unchanged relative to the pre-COVID state of insufficient supply,” the report says.

“Moreover, the impact of the rise in the unemployment rate will be muted by the exceptional fiscal support measures relative to what has been observed historically.”

However, one major risk to the housing outlook is a change in prospects for population growth, which has started to slow as immigration is impacted by border closures and other pandemic-related disruptions.

“While the Trudeau government remains rightfully committed to its immigration objectives, a modification of those, or a challenge in attracting and landing immigrants, could represent a serious headwind to housing markets,” the report says.