COVID-19 Impact on Canadian Real Estate Market

COVID-19 and Canadian Real Estate: Not a Good Combination

To fully understand the impact of COVID-19 on the Canadian real estate market, we need to evaluate what aspects of Canadian society will be significantly affected by the pandemic and the effect of these factors on residential real estate.

In Canada, the most important ripple effects of the COVID-19 pandemic are:

  1. An increase in the unemployment rate and by extension, the financial insecurity of many Canadian residents
  2. Reduction in immigration into Canada
  3. Lower interest rates
  4. Change in the value of the Canadian dollar
  5. Uncertainty about the future

Canadian Real Estate Market in 2020: Spring is Not As Hot as Predicted

The World Health Organization officially declared COVID-19 a pandemic on the 11th of March, 2020. Only a few weeks earlier in February, it seemed like the spring season would herald record-breaking sales in the Canadian real estate market. With a rise in year-over-year sales by 27% nationwide and home sales in Vancouver and Toronto rising by 45% each within the last year, Canadian cities were getting prepped for a rather hot spring real estate market.

The scarcity of new properties in cities like Vancouver and in the GTA also gave sellers higher control over the market, further increasing the average home prices.  

In spite of this strong start, market activity is invariably slowing down, with buyers, sellers, and real estate agents all cautiously approaching home selling and buying.

Factors Affecting the Canadian Real Estate Market in the COVID-19 Pandemic

How do the ripple effects of the coronavirus pandemic affect the residential real estate market in Canada?  

Factor 1: Increased Unemployment and Lowered Financial Capability of Residents

As unemployment rises and people’s incomes disappear, spending power goes down. Already, the lockdown and social distancing measures have made their mark on many businesses, especially those in the aviation, oil, hospitality, and tourism industries. Canada’s unemployment rate has risen from 5.6% to 7.8% in one month from February to March 2020 and is likely to rise to above 11% as soon as April. This massive drop in income would lead to noticeably lower demand for housing in the near future and likely until the economy recovers.

However, the effect on the overall economic landscape is quite hazy since there is a lot of uncertainty about how many waves of COVID-19 would hit different regions, when the lockdown would be halted and when it would be safe for people to return to their jobs. It is expected nonetheless that these ripple effects will be felt up till the end of 2020, and as a result, there would be fewer potential real estate buyers.

Factor 2: Reduced Immigration into Canada

In 2019, Canada welcomed over 300,000 new immigrants, with the majority of these newcomers immigrating to cities in Ontario (over 139,000 immigrants). An additional 341,000 new permanent residents were expected to be admitted in 2020.

Unfortunately, the coronavirus pandemic has led to the closing of the borders of most countries, including Canada’s. Besides this, the closure of many government offices will invariably affect immigration into Canada this year. With the significant projected drop in the number of newcomers, it is expected that demand will decrease for residential real estate, especially in immigrant-heavy cities in Ontario.

However, the housing market may not take as large a hit in cities like Toronto and Vancouver where demand will likely still outstrip the limited supply. Here, the pandemic will likely result in only a cooling of the market until economic stability returns. 

Factor 3: Lowered Interest Rates

With the Bank of Canada lowering overnight lending rates to close to zero, there will likely be a decline in the mortgage rates offered by Canadian banks and mortgage lenders.

Since the Bank of Canada’s benchmark rate strongly influences the cost of financing a variable rate loan, lenders have begun to lower the variable mortgage rates available to mortgage seekers. For fixed mortgages, however, we haven’t seen lower mortgage rates yet. This is likely because banks are considering the possibility of higher default rates due to the rise in unemployment levels. However, the bond market has a very strong influence on fixed mortgages and with plunging bond yields, banks will eventually have to lower their fixed mortgage rates too.  

Although this may lead to the increased affordability of housing, assuming no change in income, the impact of lowered interest rates is likely to be marginal at best.  

This is because mortgage rates were already quite low before the overnight lending rate was lowered and its effect would be minor in comparison to other factors such as unemployment. If income levels are not commensurate and unemployment levels continue to stay high, low mortgage rates wouldn’t make much difference as houses would still be unaffordable to unemployed or under-employed residents.

Factor 4: Change in the Value of the Canadian Dollar

The Canadian Government’s COVID-19 Economic Response Plan has already pumped up to $82 billion into different sectors of the society in the first few months of the pandemic to help individuals and businesses scale through this period. Many think that in the coming months, the government will push even more money to help different sectors. Considering that the Bank of Canada’s overnight lending rate is 0.25%, this may point the economy in the direction of imminent inflation.

If inflation occurs, the prices of consumable goods and services will increase. As it stands, there is no reason to think the inflation in consumable goods would be significant enough to have widespread economic implications since they are counterbalanced by lower oil costs. But even if rapid inflation does occur, severe effects will not be felt in the economy until at least the end of 2020. Subsequently, the change in monetary value will have a minor impact on Canadian residential real estate in 2020.

Factor 5: Future Uncertainty

Real estate markets, like all markets, are influenced by people’s predictions of the future. If Canadians believe that the economy has been severely damaged by the pandemic, leveraged real estate investments might plummet as people worry about potential adverse effects of the pandemic on the residential real estate market.  

At this point, almost everything is uncertain. This uncertainty may result in a lower number of real estate transactions but the situation is likely to revert to normal in early 2021. 

Considering All These Factors, Should Buyers Hold Off Their Purchase of Real Estate in 2020?

Not necessarily. If you had planned to buy real estate in 2020 prior to the onset of the pandemic and you have a stable source of income, this is actually a good time to purchase real estate! Right now, a prospective buyer has good negotiation power owing to the fact that residential real estate is experiencing a lull. As such, you would be able to get a very good bargain price. However, working with a versatile real estate agent who can conduct excellent market analysis and has superior negotiation skills is essential if you want to buy a home during this period. 

Conclusion

The Canadian real estate market will mostly be affected by the increase in unemployment and reduced immigration, both of which are effects of the pandemic. Uncertainty about the future might also lead to fewer real estate transactions until early 2021. Factors like lower mortgage rates and inflation are likely to have only a marginal impact on residential real estate purchases. With the help of a versatile real estate agent, prospective buyers with a stable income are better positioned to get a good deal if a home is purchased now as the pandemic has tilted the negotiation scale in their favour.

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