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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.

Housing prices in Ontario and the GTA are down by 26 percent after the decision of the Ontario’s government to introduce a foreign-buyer’s tax. The new tax applies to corporations purchasing certain properties, non-permanent residents, and foreign nationals. The measure was introduced in an effort to cool down the housing market and stabilize residential property prices. The new tax also aims to curb speculative activities and is aimed at individuals who are in the game for a quick profit.

What Experts Say

Some experts warn that the market in Toronto and Ontario in general is in a bubble much like the 1980s. Others counter-argue by pointing to the fact that indicators such as demand for residential properties, population growth, and interest rates are more stable today than during the 80s. The situation was also very different then, with different factors at play, one being that the province was on the verge of recession. The only similarity that some experts see is that housing prices skyrocketed. Chief Economist Sherry Cooper also highlights the fact that in 2008, the U.S. experienced largescale foreclosures, market collapse, financial crisis, and underwater mortgages. In Ontario, none of this is happening.

The question now is – are housing prices finally going down for good? The drop in demand can be explained partly by the fact that many homeowners were quick to list their properties before housing prices reach peak values. At the same time, demand dropped substantially. When it comes to the introduction of the new foreign-buyer’s tax, experts point to the fact that foreigners are a small percentage of all buyers to cause prices to plummet. Plus, the majority of foreigners who purchase a property in Ontario qualify for a rebate. In fact, a press release by the Toronto Real Estate Board reveals that less than 5 percent of home purchases in the Greater Toronto Area involve a foreigner.

Some experts claim that the sharp decline in property prices is mainly caused by domestic investors withdrawing from the housing market. There is a significant decline in demand for residential housing purchased to rent. The main reason for experts is that investors wait to see how the new set of measures will affect the market. If this is the true state of things, then the housing market will continue to fluctuate.

Counter-Arguments: Prices Are Not Going Down

The Toronto Real Estate Board, for example, published a report according to which housing prices are expected to grow due to a high demand and a more limited supply of new listings. The expected increase in sales prices is up to 16 percent. The average price for residential housing is in the range of $800,000 – $850,000. Townhouses, semi-detached houses, and detached homes will see the strongest price increase in 2017. Affordable housing is a concern for many in light of the fact that prices are expected to increase at a quicker rate compared to income growth. According to the Toronto Real Estate Board, policy makers must devote time and energy to develop policies to solve the main problem and namely, the shortage of residential housing for rent and sale. Close cooperation between non-governmental organizations, businesses, and the public sector can help to this end.

Trends

A recent survey by Ipsos shows that the majority of new homebuyers are ready to make a considerable down payment of more than 27 percent. Money comes from different sources, including home equity, gifts from family members, savings, etc. This is an indicator that demand is stable and the market is not cooling down.

The Toronto Real Estate Board analyzed how factors such as price growth, supply, demand, and affordability come into play. The Canadian Centre for Economic Analysis was tasked to study the link between housing prices and factors such as Metrolinx and enhanced transit in general. The study reveals that Metrolinx has a positive impact on home prices in the Greater Golden Horseshoe and the Greater Toronto Area. This is due to the fact that more and more residents have the chance to commute and benefit from the improved infrastructure. The RER is expected to increase home prices by as much as 12 percent.

At the same time, a survey conducted by RBC shows that about 25 percent of residents plan on buying or investing in a residential property. This figure was 30 percent in 2016. There are three factors that come into play, one being uncertainty whether the Canadian economy is performing robustly. Housing affordability is another factor and a growing concern. A third factor is the belief that prices will eventually go down. Whether this will happen and whether prices are finally going down is still unclear. Figures show that prices have gone up by as much as 33 percent in just one year.

Premier Kathleen Wynne admits that measures and policies to cool down the housing market often have unintended consequences. The provincial governments and authorities are not in the position to control residential housing price growth or capital gains taxes. The only tool that provincial governments have is land transfer tax. What they already did was to increase the land transfer tax rebate, which resulted in savings of about $2,000. The Finance Minister announced that the government will develop a set of new measures to cool down housing prices but there is no clarity on what the measures will be. When it comes to policy making, the problem is that stakeholders can’t reach a consensus on the root of the problem. Some experts argue that the real problem is the shortage of land, others point to the shortage of low-rise residential homes, and still others argue that foreign buyers are to blame. And while it is still unclear whether prices in the GTA and Toronto are finally going down, it is clear that rising prices mean high demand and vice versa.