The rise in household debt and housing prices during COVID-19: the role of pandemic support policies

There was a significant increase in housing prices and household debt during the Covid-19 pandemic in Canada, even though both output and consumption experienced severe contractions. While a shift in household preferences toward housing---largely driven by increased demand for work-from-home arrangements---appears to be the primary driver of rising housing demand, various pandemic-related policy interventions may also have contributed to these trends. In this paper, we employ a medium-scale DSGE model calibrated to Canadian data to assess the contribution of pandemic-related support policies, including fiscal, monetary, and credit measures. Our findings indicate that these policies played a key role in driving the housing market boom during the pandemic, accounting for approximately 45 percent of the observed increase in household debt. In the case of housing prices, the model explains about 40 percent of the observed rise, although it fails to replicate the gradual increase observed in the data, instead predicting a more immediate rise.