Residential real estate: a reckoning or just a softening?

24 May 2020

Statistics show that the activity of housing real estate has gone down by 65% all over Canada. The reason lies in COVID-19. Statistics of Royal Lepage even highlighted the moment when this recession has reached terrifying -80% in Toronto. Such a recession is caused by loss of revenue, mass unemployment, a slowdown of immigration, harsher conditions for condo owners,  house sellers, and landlords of multiple properties.  

With this knowledge, buyers seem to be still interested in real estate. Experts and executives from Realosophy, Canadian property brokerage, have thought that the real estate market would be on the intermittence for some time, and sellers would come to save the situation. However, after some weeks, buyers entered the market but it is not the case with sellers. In comparison with previous weeks, the brokerage has fewer listings and a little bit higher sales. 

Residential real estate
Residential real estate

According to reports from REITs analysts at Veritas Investment Research, the conditions on the market are also good and assisting in the multi-housing sphere. For instance, in Eastern Canada and Ontario statistics show that rent collection for the property was almost 100% in April. At Boardwalk Rental communities in Alberta, the level of rent collection was 92% in the middle of April. Specialist reminds that the high level of rent collection is not a marker of the general population of landlord and especially professional ones. 

Nevertheless, although the situation in the real estate market is more or less favoring, it will not stay for long this way. 

Challenges increasing

Among this chaos, you can concentrate your attention on unemployment rates and even more on reemployment rates. CIBC Capital Markets remind us previously at the end of February 2020 the rate of unemployment was about 5.5%. However, the company predicts that this rate will rise by 14% and go down to the fall plateau of 8% at the beginning of 2021. 

While many businesses have financial issues, experts are not sure about the number of people who will be rehired by those companies. No drastic measures can help here. However, companies should think about step by step restarting of the economy. For instance, if your company previously had about 25 employees and reduced the number up to 4, you will have to rehire once again only 6 or 9 previous employees. These actions may lead to softness in many markets, real estate is also among them. 

Furthermore, the situation with unemployment calls into play the historically high levels of debts of Canadian households. The average level is about $1.78 for each $1 of a period after paying taxes. According to the CIBC reports the enhanced levels of indebtedness will cause a negative shock to some profits that come from job losses. As a result, that will increase the number of mortgages to pay off their arrears.  For now, from 10 to 15% of all mortgages borrowers have postponed payments, 

The issues with  rentals

The issues with  rentals
The issues with  rentals

Experts believe that this issue will leave a bigger impact on the rental market. This market is already waiting to be hit by various issues. Among the unemployed usually are young adults and part-time workers, who mostly work in restaurants, retail, and tourism. Furthermore, young people more often do not play big roles in the residential industry. 

Many signs demonstrate a downward pressure on rent process, with a renter who can not pay for them. Many landlords of their condos because their cash flow is negative nowadays and does not even meet the carrying costs. Many of them are not quite ready to give away $200-$300 on carrying costs per month. If we look at big urban markets, rents are often more than $2,000 per month or even more than monthly relief from the Federal government. 

Furthermore, these recent pressures might be responsible for a real estate market crash in the nearest future. For now, there are banks in Canada that can provide big support through restructuring mortgages, the Canadian Mortgage and Housing Corporation that provides those mortgages. There is also a Bank of Canada that can purchase bank bonds if they have a lack of money. unfortunately, in the United States banks securitize mortgages on a massive scale. Moreover, in Canada, there are different Federal relief programs in the amount of $200 billion for companies and individuals. These conditions propel forward the reckoning for the real estate market. 

Immigration question

Real estate professionals believe that pause on immigration is going to be the main factor that will influence the real estate market. Thanks to the immigration Toronto population grows by a counterpart of one Calgary every decade. 

Statistics show that about 72% of all immigrants who live in the country for more than seven years have their properties. Thus, Canada should not be afraid to face impact from the residential market that can be connected with immigration. However, the situation may change in three or seven years from now on. Of course, the rental market will be the first to feel the impact, however, it is still quite tight. For instance, In Toronto, the availability of a rental is less than 1%, while in Montreal it is about 2%. 

The situation in the United States

With a breakout of coronavirus, the rental market in the United States was tight. For instance, the prices for property in Seattle have gone up drastically mainly because the city has turned into a key tech hub of the country. While the whole country has faced rental shortages, available properties for sale in Seattle has dropped a drastic 27%  year-over-year at the beginning of 2020.

The rental market in other U.S. cities is not doing better. While the demand is historically high, the supply is unbelievably low all over the country. Such a mix means that prices for properties are also historically high in many cities because would-be purchasers are bidding on a small number of properties for sale. 

In late 2019, the amount of real estate for sale went even lower, especially on the West Coast. In comparison with 2018, then many U.S. cities had two-digit percentage decreases in selling properties. The decrease can be seen easily because, with the fall of sale, the number of supply went up. Specialists remind us that rise in supply was short-lived, Nowadays it has gone back to almost historic lows in terms of the level of availability for various markets and the United States in general. 

If we talk about demand before the COVID-19 main indicators showed there would be a lot of purchasers in the real estate market.  The huge growth of wages, low level of unemployment, and mortgage rates are real signals for high levels of demand. However, with nowadays situation the unemployment rates have skyrocketed, many companies implement pay cuts for their employees, web traffic to real estate websites, and mortgage apps demand has dropped. 

This drop does not change the circumstance for most people. Even if the U.S. real estate market faces a full recession, the rental market will still stand strong. Previous recessions show examples when prices for properties even went up. 

The situation in the United States
The situation in the United States

Also do not forget that while the stock market faces issues, many investors start looking for many secure places to invest their money. Unfortunately, the stock market may influence the rental market in the same way.  There is a platform called Rofstock that is used by investors to purchase and sell rental properties for single families. Since the beginning of the outbreak this platform has a huge rise in web traffic mainly because now many world investors look for more security investment variants. 

Plan of actions

If we look in the perspective, things are not as bad as they seem. If market recovery is going to happen without any big second waves of fall, in about a year residential property market will forget about the crisis and will not suffer it much. All in all, in comparison with the 2019 levels, prices are expected to be lower by 5-10%. 

Many professional analysts agree on the thought that for many people their houses are their shelter on all senses. If there no need to sell it then do not do it. Do not always rely on a recession that can change the situation. 

Many investors think that if they sell and rent, they are going to have a good potential for profit. However, it is not always a case. Do not make a fuss about the value of your property, the fundamentals have not changed. Of course, prices will become softer, but not for too long. 

However, there are cases when people have no other option but to sell the property. The reasons can be health, retirement, and other considerations. Of course, if you think about selling your real estate in two or three years, then we recommend you to do it now because you will never know what rental market will go through in the future. There is always a chance that you are going to miss a bull market, however, if you do it now, you will not lose very much. 

If you are an investor, try to pay attention to the REIT market. Specialist states that they were sold all irrespectively at the end of March, even if they were rebounded in some way. however, if you are going to study the situation more intently, you will probably find some good profit there, however, that relates only to an individual title. Do not try working with an ETF or an index.

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