COVID-19 has made reading next year's real estate market harder than ever

Canadians are about to get an update on the state of the housing market and the latest resurgence of COVID-19 has only added another layer of confusion to a year of uncertainty over where real estate prices will go in 2021.

On Tuesday, the Canadian Real Estate Association is expected to roll out its latest sales figures and prices for resale homes, and while most property watchers see a continuing short-term trend of weakening high-rise condo prices and increasing low-rise prices, the longer term impact of the pandemic remains far less certain.

An informal sampling of economists who keep an eye on the residential real estate market shows a range of views based on considerations related to how long the impact of the disease will last, including rock-bottom borrowing rates and whether buyers will continue to bid up the price of low-rise homes most in demand.

When it comes to residential real estate, price changes have a big effect on ordinary people for whom a home is a place to live, not just an investment. But even then, for most people a home remains their largest lifetime purchase. And unlike other investments, managing real estate is relatively complex and demanding.

Unintentional landlord

When Anna Blackwell and her husband bought a two-bedroom downtown condo in 2016, the Wilfrid Laurier University political science grad had no intention of becoming a landlord. But after one of the pair was offered a transfer to Portland, Ore., the couple decided to rent out their Toronto home — at least until they knew if the move stateside was going well. In September their tenant gave notice and, at the end of November, moved out.

"We were quite shocked when we found out how much lower we'd have to list to get our place rented in this competitive market," Blackwell said in an email conversation. The property that had been earning $3,150 a month was now generating $2,600.

Falling rents have been good for tenants. And though the decline hurt, it was by no means devastating for Blackwell, who bought four years ago in a sharply rising market. But as the business news service Bloomberg pointed out last week, property investors taking possession of condos they signed up to buy when the market looked hot, are now caught in a bind — having to accept losses on rent or a loss when they sell.

The decline in rental income and property prices did not come as a surprise to Ben Rabidoux — who runs North Cove Advisors, an information service for the professional residential real estate market — and who predicted the current shakeup in the rental market back in April. He suggested a sharp fall in demand, accentuated by what some saw as an excess of high-rise construction in some of Canada's hottest markets, would translate into declines in sale prices if the effect of the pandemic lasted more than six months.

Blackwell was lucky to get a tenant for her Toronto condo. Other reports say vacancies have risen so much that speculators are moving to buy rental buildings, hoping to upgrade empty flats and charge more once the market bounces back, since in many markets empty flats are less affected by rent controls.

Although based on U.S. figures, data from Pew Research shows that, as the economic effects of the pandemic continue, more young people are living with their parents than at any time since the Great Depression. That was only one of the reasons, including a plunge in immigration and a decline of temporary residents, including foreign students, that Rabidoux cited for the falloff in real estate demand.

Like the rental speculators, economists representing real estate businesses and experts in the banking industry almost universally express confidence that declines in the condo market are temporary and that markets will get back on track once Canadians are vaccinated.

Many say that outside crowded city centres, demand for housing in suburbs, smaller cities and rural areas will only strengthen. BMO economist Jennifer Lee suggests buyers will continue to look for more space in a work-from-home boom which may not end with the pandemic.

"Instead of taking the train in, you can go a little further away now where real estate in the past has been cheaper," said Lee.

Going a little further away

Carl Gomez, Canadian chief economist for the U.S. real estate data giant CoStar, agrees that rising house prices in big cities will continue to push up demand outside the urban centres. But he is less confident that pent-up demand created by low rates during the first lockdown can persist at the same rate.

On Friday, Statistics Canada released new data showing that consumers were back on a borrowing binge, and that demand for mortgages and housing investments hit an all-time record during the three months ending in September. Data from Vancouver and Toronto real estate boards earlier this month hints that, for now, that rush to borrow continues.

But Gomez says inner-city markets like Toronto have seen a glut of what he calls "shoe box condos" favoured by investors — not to live in or even necessarily to rent, but because they have been steadily increasing in value.

"I question whether that demand is going to be there in the long run," he said.

The long term really matters for the homes we buy to live in for decades at a time. And while high levels of immigration have helped push up demand in recent years and falling interest rates have helped lift prices, not everyone is convinced those two things are going to continue.

Economist Moshe Lander is one of those willing to say some of the things that people in the property business would just as soon leave unsaid. Lander worries the pandemic could signal a demographic turning point in the market.

"No matter how much immigration we have, there's not enough incoming demand for housing in whatever form," said Lander, citing Canada's aging population and low birth rate. "It's just not the great investment that it used to be."

He said that people in Alberta and those who invested in Toronto condos are getting a little taste of a market that does not reliably rise month after month and year after year. And he warns that today's attractive interest rates, now as low as one per cent, may end up having a distorting effect because there is no way they can last over the life of the mortgage.

"[Home-buyers] could find themselves very quickly sitting in a situation where the real value of their debt hasn't been eroded by inflation," said Lander, "and they are now facing higher interest rates with very little equity built up in the home, especially if house prices don't rise the way they used to."

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