The housing market in Canada shrank due to the coronavirus crisis, and new construction and sales are expected to remain at below pre-pandemic levels in the next two years. Experts discuss different scenarios, from real estate crash to growing demand for detached homes and rise of real estate due to inflation.
Real Estate Crash
The flood of properties for sale may lead to a real estate crash, and CMHC already warned that the market will experience a historic recession. Home sales have declined due to job loss and financial hardship, and prices are expected to plunge by 9 to 18 percent in 2020. Still, experts believe that the chances of a real estate crash are low because of the moderate impact of the pandemic on global markets. According to RE/MAX Canada, more people are looking to invest in properties because of plunging stock prices and financial market uncertainty. What is more, top-tier properties are now in demand in cities such as Vancouver, Toronto, and Montreal, which can help offset a “significant cooling”. A real estate crash is an unlikely scenario in Canada, according to RE/MAX. This would involve a sharp decline in prices due to a rise in supply, coupled with stagnant demand. While demand is certainly declining and expected to further decline, an influx of supply is unlikely.
The good news is that prices in large urban centres such as Vancouver and Toronto are expected to increase and even exceed pre-pandemic levels by mid-next year. What is more, Scotiabank senior economist Marc Desormeaux highlights that both demand and supply shrank meaning that potential buyers are not looking for homes, and homeowners are not selling. Prices were to drop significantly if supply stayed constant or increased and demand fell, which is not the case in Canada. One possible scenario is that homebuyers choose to sell in the coming months, either because they can’t afford to make mortgage payments or they need to boost their retirement savings. While this may result in an influx of supply, potential homebuyers may choose to wait until the economy shows signs of recovery. Over 3 million Canadians lost their jobs amidst the pandemic, and many worry what the future holds.
An influx of supply is also unlikely as the pandemic hit the construction industry. Many developers worry about construction stoppages and delays while others cannot get building permits. Estimates by the Canada Mortgage and Housing Corporation confirm this. A drop of 51 to 75 percent in housing starts is expected in 2020 compared to pre-pandemic activity. The industry will only return to work by mid-2021. Prices and sales, however, depend on consumer and business confidence once restrictions are lifted and the pandemic is over. It is difficult to predict how quickly the economy recovers because researchers are still in the process of studying the new virus and developing models and possible scenarios.
When it comes to real estate markets, experts warn that some factors are more difficult to predict but also play a role. One is how many Canadians cannot afford to own a home after government subsidies and mortgage deferrals are terminated. Another is how many people will lose their jobs and become permanently unemployed. How many businesses will close is another factor that will have an impact on demand and sales prices.
The Impact of Immigration Decline
Experts also point to the fact that the real estate market shrank because immigration declined significantly. In 2019 alone, 341,000 foreign nationals settled in Canada, 11 percent of whom coming to Vancouver and 35 percent moving to Toronto. The Bank of Nova Scotia estimates that a 1 percent population decline is equal to 1 percent decline in real estate prices.
Flood of Properties
Some experts predict a flood of properties because of a decline in rent prices that makes it increasingly difficult for landlords to make money on them. Rates for condominiums and rental apartments have gone down in Ottawa, Edmonton, Calgary, Vancouver, and Toronto. The biggest decline is in York, Ontario, with rates falling by 12.6 percent. Two cities experienced rental price increases – Montreal by 0.6 percent and Regina by 1.6 percent.
Rise of Real Estate
Another possible scenario is the rise of real estate due to money printing and inflation. Massive government spending to support businesses and households could result in inflation and price increases. What the Bank of Canada did was print money to buy bonds, which is what other central banks did so that people spend their money elsewhere. In fact, what governments aim to prevent is deflation, which is the opposite of inflation. Many believe that deflation is a likely scenario due to low demand and high unemployment rates. While money printing helps businesses recover and rebuild capacity, low demand may result in a significant decline in prices. People stop buying all sorts of commodities, from plane tickets and gas to vehicles and real estate. Others disagree, however, and warn that we are headed to inflation. According to market analyst Gary Tanashian, pouring money into the economy results in inflation as it is difficult to reduce the amount of cash in circulation at a later stage. Once restrictions are lifted and everything goes back to normal, with people dining, shopping, and travelling, the economy will face excess dollars in circulation, coupled with increased demand. What central banks can do in this scenario is raise interest rates to control inflationary trends.
Rising Demand for Detached Housing
Detached houses are considered safer during a pandemic which may result in rising demand. The Covid-19 crisis slashed home sales by 50 percent in markets such as Toronto, and listings for semi-detached and detached homes decreased by 14 percent between March 17 and 23 and by 30 percent between March 17 and 30. In May, however, prices of detached homes increased by 2.6 percent in the Greater Toronto Area. While listings are still a handful, real estate agents explain that this is mainly because of the restrictive rules on showings. When showings cannot take place, sellers simply choose to terminate them.
Impact of the Housing Market on Other Sectors
Many Canadians are hesitant to travel amidst a growing global pandemic and are allocating their travel money to renovation and construction projects.
At the same time, the fall in prices and home sales already has a significant impact on sectors such as construction, financial services, and the furniture industry. Construction businesses, furniture stores, banks, and other businesses depend on real estate sales to operate and make money. Not only this, but with travel restrictions, stay-at-home orders, and social distancing rules, many people venture out just to buy household supplies, medications, and groceries. The real estate industry has been hard hit as restaurants, entertainment venues, and shops closed doors. The coronavirus crisis made it increasingly difficult to keep up with mortgage and lease payments, and many businesses chose to move online or close. Others took a transformative approach to strengthen relationships with customers, partners, suppliers, investors, and employees that will help them to succeed past the pandemic crisis.