COVID-19 Impact on Real Estate - June 15, 2020
Sent to Clients on June 15.
Real Estate Market Overview
May sales results in the GTA improved considerably compared to April
2020, with prices showing modest improvement both month-to-month and
year-over-year. However, compared to May 2019, sales have dropped
considerably.
There were 4,606 sales in May 2020, down by 53.7%% compared to May 2019 but up 53.1% compared to April 2020.
Total Residential Sales
Source: TRREB Marketwatch
The average selling price was $863,599, up 3% versus year ago and up 4.6% compared to April 2020.
Average Selling Price
Source: TRREB Marketwatch
There were 9,104 new listings in May 2020, which is down by 53.1% year-over-year.
That fact that new listings are down is keeping the market relatively
balanced. Many people are choosing to wait to sell homes. Those who are
selling are reaping the benefit of the low number of listings as demand
helps to keep prices solid.
Real Estate Market Outlook
In past newsletters the outlook for the overall housing market has been
well covered - most economists are predicting a mid-term drop in home
prices later in 2020 as government stimulus runs out, mortgage deferral
periods are up and unemployment remains high. If homeowners struggle to
pay their bills, homes will be put on the market creating a supply
imbalance that will result in price deflation.
In this newsletter I thought I'd do something a bit different and write about the outlook for the real estate investment market and ultimately the new housing market since the two are inextricably intertwined.
Outlook for Real Estate Investment
Canada's housing supply is very dependent on real estate investors who buy pre-construction units either for re-sale or to use as rentals. The investment market is suffering as a result of COVID-19 for a number of reasons:
- The rental market is suffering. The long term rental market is fueled by immigration while the short term rental market is fueled by business and leisure travel. Both of those sources of renters have dried up as a result of closed borders and restrictions on travel. Immigration in Canada has fallen from approximately 30,000 new arrivals every month to nearly zero. According to TD economist Rishi Sandhi, "Stalled population growth will test the resilience of investors whose units will be completed soon, as the pool of potential renters will shrink in the near-term." In addition, many other potential renters have lost employment or been unable to find employment and have chosen to live with parents or stay with roommates until the economic situation improves.
- At the same time demand has been reduced, supply is set to increase in markets such as Toronto. Before the pandemic, 25,000 to 29,000 housing units were expected to become available in Toronto in 2020, an increase of 100% over 2019. Although some of these may be delayed, the majority are expected to complete as planned.
- Partly in response to reduced travel and partly due to newly-imposed short-term rental restrictions, many owners of Airbnb short-term rental units have placed their 'furnished' properties on the list of long-term rentals adding to the surplus. To give this some perspective, it is estimated that this could add 7,900 vacant units to the Toronto rental market, more than the total number of available units at the beginning of the year.
- In Toronto, where the rental vacancy rate was around 1%, landlords are finding themselves either stuck with empty properties or forced to offer rate incentives to rent their properties.
As the surplus of available rental properties increases, the rental prices drop. In May the average one-bedroom rent in the GTA was down by 5.1% to $2,086 and the average two-bedroom rent was down by 5.6% to $2,740 according to TRREB.
In some cases investor-owners are already seeing negative cash flows on their GTA rentals. A research study from Bullpen Research & Consulting found that units in some recently finished Toronto condo buildings have seen between $200 to $600 in monthly negative cash flow.
In addition, landlords may have tenants who have lost their jobs and have been unable to pay rent.
As they begin to lose money, over-leveraged investors will try to shed their investment properties pushing the surplus to the sales market and resulting in sales price deflation.
Impact on Housing Starts
Longer term, the new housing market will feel the impacts of COVID-19. Lack of immigration, the challenges facing first-time home buyers (job losses and tightening of mortgage lending requirements) and the lack of investors will cause a slow down of new home starts."This pandemic could have a real impact on the supply of new housing in the GTA in the long term, as missed payments by tenants and lower rents could have many investors rethinking future pre-construction condo purchases," says Ben Myers, president of Bullpen Research & Consulting, "These buyers help developers reach pre-construction sales targets, and a decline in investors will result in significantly less new housing supply in four to five years if these purchasers change their condo-buying habits."
In summary, while the extent of the impact cannot be fully understood at this stage, the expectation is that the effects of COVID-19 on the housing market may be felt for a number of years.
Selling a Home During COVID-19
As indicated in the overview of May results, we are seeing buyer activity picking up over the past few weeks with more showings on our listings and more sales. REALTORS® are abiding by guidelines on how to sell property safely, including an increasing reliance on virtual tools for conducting meetings, property showings and open houses. But will people buy a home that they've only seen virtually? Interestingly, in some cases, yes.A new research report conducted for OREA (Ontario Real Estate Association) by Nanos Research found that over 4 in 10 Ontario homebuyers would be open to purchasing a home even if they could only view it virtually! The largest proportion (47%) of those willing to buy sight-unseen were younger buyers aged 18-34.
So when might this work out? In the case of one young couple profiled for a Toronto Life story, they made a purchase without an in-person viewing because they knew exactly what they wanted and found it. They knew the neighbourhood they were looking in, and had viewed very similar homes so they could easily get a feel for the property from the virtual tour. They were well educated about the buying process and felt comfortable taking on the risk.
Not surprisingly another 30% of homebuyers said 'no way', that they would NOT be willing to buy a property without viewing it first-hand.
It will be interesting to keep an eye on the number of buyers purchasing sight-unseen to see if it becomes a trend during the pandemic.
Help for Homeowners
As I write this on Friday June 12th, the number of daily new cases of coronavirus in Ontario dropped to below 200 for the first time in 2 ½ months. Much of the province moved to Stage 2 of reopening with the government saying that the GTA, Niagara and Windsor will follow shortly as well.What will re-open in Stage 2?
- outdoor dine-in services at restaurants such as patios
- hair salons, barber shops, tattoo parlours and other personal care services
- shopping malls with some restrictions on activities
- tourism such as winery/brewery/distillery tours, boat tours, bus tours, bike tours and walking tours.
- Swimming pools, wading pools and outdoor splash pads
- Beaches and camping at Ontario Parks and private campgrounds
- Outdoor activities for team sports
- Drive in venues for movies, cultural activities and animal parks
- Film and TV production subject to physical distancing
- Weddings and funerals of less than 10 attendees
In addition, in all of Ontario gathering sizes of non-household
persons has been increased to 10 people with physical distancing taking
place, child care centres are allowed to re-open under strict guidelines
for operation, and houses of worship are allowed to re-open limited to
30 percent capacity to allow for physical distancing.
That's it for this update. If you missed any of the past COVID-19 Impact
on Real Estate updates you can find them on my blog here: http://stephhebbrealestate.blogspot.com/
There is also a ton of other information on the blog about buying or selling real estate so feel free to check it out.
Please note that going forward I will be publishing the COVID-19 Impact
on Real Estate newsletter on a monthly basis. I think that once a month
will be sufficient because new information isn't flowing as quickly as
it was at the start of the pandemic. Also, as the market picks, up I
find myself getting busy again with buyers and sellers with less time to
write.
Please let me know if you have any questions or feedback at Stephanie.hebb@royallepage.ca.
Stay safe.
Steph
More reading:
https://torontolife.com/real-estate/i-bought-a-house-without-an-in-person-viewing-when-i-signed-the-contract-i-noticed-something-interesting/
https://www.livabl.com/2020/06/canadian-homebuilding-threat-slower-population-growth.html
https://www.livabl.com/2020/06/toronto-condo-apartment-rents-dip-5-may.html
https://www.livabl.com/2020/06/4-10-ontarians-consider-buying-virtually-orea.html
https://www.livabl.com/2020/06/canadian-home-prices-forecast-drop-pandemic-fallout.html
https://torontostoreys.com/toronto-home-sales-may-2020/
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