Is the Real Estate Market in Canada Going to Crash?
It is almost eerie to think about how much has changed within the past month as our lives, economy, and the way in which we interact has been so profoundly impacted by the coronavirus pandemic as it creeps its way across international borders. There is a great deal of uncertainty as we continue to learn more about how the virus spreads, and how long precautionary measure, like social distancing, will need to be maintained to ensure the safety of the population.
Many within the real estate industry in Canada have already shifted the way in which business is conducted, opting for 360-degree tours and video walk-throughs in place of open houses. Agents are making use of electronic tools and apps to sign paperwork, to help limit exposure for the safety of their clients. Despite these concessions, the national market will certainly take a hit, as a number of buyers and sellers will put their real estate plans on hold until the crisis subsides. This begs the questions: what will be the extent of this hit? Are we as a country, heading towards a real estate market crash? While there is no definitive answer during this time of uncertainty, taking a look at the present (and some past) national economic and real estate trends can help us form some predictions about what the future holds.
Learning from History
Before diving into the current climate and trends, let’s first pause for a quick look back at the impact of the 2003 SARS epidemic, which hit Toronto with considerable force. The death toll of the virus was significant, and there was an enormous cost associated with the resources deployed to contain the spread. While the protection measures may not have seemed as extreme as the country-wide social isolation that we’re adopting today, there were still strict protocols implemented by Heath Officials within the city, such as discouraging handshakes and discretionary travel. Despite the challenges experienced by Toronto to contain the virus, the Canadian economy did not take a hit, and in fact the Canadian GDP grew by $134 billion in 2003, and while the Toronto housing market was expected to slow down as a result of the epidemic, housing sales data from that year show no signs of suffering. In fact, sales volumes increased, as well as average sale price, staying on the same trajectory as what was initially expected for that year.
Coronavirus, to date, has exceeded the global death toll of SARS, and we can expect that the economic fall-out will be more pronounced. However, using the SARS impact on the Canadian housing market as a baseline, there is hope that any dips will be moderate, and not long term.
COVID-19’s Mark on the Stock Market
The COVID-19 pandemic has dealt a fierce blow to the global stock market, sending it into a record-breaking nosedive at the start of this month, and increasing its volatility as a result. Still, economists say that so far, the virus’s impact on the global economy has only been moderate. Up until this point, housing markets across Canada haven’t yet shown signs of following the same trajectory as the stock market. For younger Canadians who were counting on their investments to help pay for down payments, this will mean pressing pause on plans to enter the market.
However, for those who have the money, real estate has never looked more enticing. In light of these precarious stock markets, those looking for a more sound area to invest their money are now turning to Canadian real estate. As a result, over the course of March, the volume of top-tier real estate properties (residential sales over $1 million) sold across Montreal, Toronto and Vancouver has soared. Should this trend continue, it may help to prevent any significant cooling of the Spring market.
Household Debt: Our Dirty Little Secret
Canadians, unfortunately, carry a heavy household debt burden. Canadian households have the highest debt of all counties in the G7, and savings rates remain at a 60-year low. This means, in a time of sudden financial hardship, like the global pandemic looming over our heads, there are limited funds for Canadians to dip into to weather the storm. Unemployment rates are climbing as a result of virus-related business closures, and it is uncertain whether the Government assistance being provided to Canadians will be enough to help sustain Canadians through any economic shocks.
The Bank of Canada cut the overnight lending rate by more than 1 full percent this month, an initial reaction to the pandemic, to help soften any market impacts. While this has made it easier for Canadians to secure a variable rate mortgage or a line of credit, it will be interesting to see over the next month or so, whether these low interest rates will entice a population which is already deeply in debt, and face much economic uncertainty in the wake of this crisis.
If demand does begin to wane over the next few months, this may lead to downward pressure on housing prices in markets across the country.
A Cool-down for Sizzling Prices? Not Yet.
February’s market reports only prove that most urban centres country-wide were headed into another hot Spring market, with record prices from coast to coast. While open houses are being cancelled, and buyer levels dropping, these factors alone would lead one to believe that a decline in prices is soon to follow. Speculators are saying, however, that we shouldn’t hold our breaths. What is more likely to happen, as a result of this public health crisis, is more of a levelling off, rather than significant dips. The prices have been climbing at such a steep, unsustainable rate, that they were bound to be reined in at some point. However, with levels of housing inventory so low in so many of the country’s hottest markets, it’s unlikely that any price change will be jaw dropping, or even noteworthy.
So, Will the Housing Bubble Stay Afloat?
A real estate bubble is driven by high demand, skyrocketing prices, limited supply, and unsustainable spending. To burst, or for a real estate market collapse to take place, there would need to be a stagnant demand, with an influx of supply, leading to a sharp drop in prices.
While little remains certain about the months ahead, based on the market’s reactions in the past, and the factors currently at play, is that Canada will likely come out of the Covid-19 crisis with markets across the country remaining relatively strong. While demand is expected to decrease as a result of the outbreak, there aren’t enough signs indicating an increase in supply, or any significant impacts upon price. The odds of a bursting bubble are low, at least in the short term.
From Remax Blog