The Silver Lining to COVID-19: Real Estate Affordability

This article was written by our guest publisher, Denis Wu, Toronto Real Estate Agent

THE BRIEF

What’s Going On Here? COVID has slowed down the global economy, But what’s really happening in the Toronto real estate market? 

If you’re reading this, you’re likely someone who’s been actively monitoring the real estate market for some time now. Property seekers have seen the market reach unimaginable prices (Toronto record highs of ~$910k) in Feb 2020 which ended with a sudden halt in activity. 

With COVID-19 slowing what was set to be one of the hottest markets in Canada, April year over year (YoY) numbers showed Toronto real estate prices remaining largely stagnant from last April – an average price of $821K. Meanwhile, residential sales volume plunged 67% from 9,005 homes sold down to 2,975 sold.

THE EXPLANATION

Although this may be a once in a decade chance to get a nice deal on a property in a red hot market, buyers are left with limited options. Despite recessionary indicators, real estate prices have been flat to its pre-COVID-19 levels. Below are the factors which contribute to this: 

• Low supply and minimal competition of properties in the market results in higher prices. In April 2020, new listings amounted to 6,174 compared to 17,212 in April 2019. New builds will need to pick up before we see a shift in the prices affected by a supply.  However, COVID-19 has resulted in construction inefficiencies and disruptions to the supply chain which will inevitably slow the supply growth. It is projected that new homes built in 2020 will decline by 30% (~137,000 homes in 2020 vs. ~190,000 in 2019).
• Government assistance coupled with unpredictability in the market driving sellers’ behaviour to hold their property, resulting in a lower supply. Potential sellers are holding onto their properties for several reasons: 

1. 1. Missed opportunity to sell in a hot pre-COVID market and are likely to hold onto their property until the market rebounds. 
   2. Holding off because they have access to government assistance programs such as the CMHC mortgage payment deferral program (deferral of mortgage payment for up to 6 months). 
   3. Believe that keeping their wealth in the form of real estate is better than holding onto cash in these unprecedented times. 

• High unemployment rates can lead to lower competition in the market which leads to lower demand. Prior to the disruption with COVID-19, Canada’s unemployment rate was 5.6% in February 2020 compared to 13% in April 2020. Jobs in the manufacturing and services sector were affected the most. If we see a continued trajectory of sustained job losses, we can expect a steeper drop in demand.
• Low immigration leads to lower demand for properties and less sales. In 2019, 1 in 5 homes sold were purchased by immigrants. Until there is a vaccine and with borders currently closed, the reduced global movement will have buyers seeing less competition.

THE ACTION

Prepare and know what you have to work with: 

With the above factors being out of your control. Let’s take a step back to evaluate the factors that are within your control. At the end of the day if you’re ready today, you’re ready tomorrow. 

1. Get your mortgage pre-approval and finances in order. If you were to lose your job tomorrow, would you be able to close? Getting a pre-approval gives you an idea of the interest rates your bank is offering.
2. Understand your budget and future income streams. During uncertain periods, it is strongly advised to revisit your budget. A stronger cash position is necessary to deal with uncertainties with job stability and emergencies. To see how much risk you can take on, you need to fully understand your costs. Banks generally say 30-32% of your annual gross income should go towards your property (which includes the mortgage payment, utilities, property taxes, etc). 
3. Understand your position if housing prices continue to dip or if it rebounds. If prices drop further, will you still have your job to take on a mortgage? If the market rebounds to February prices, will you be disappointed or worse, priced out? If you decide to buy now, know that with the market currently at ease, buyers can take their time negotiating an offer without the pressure of competitive bidders. 

At the end of day, you cannot time the real estate market. It is an investment where you need time in the market to find the best property that suits your specific requirements and constraints. The best way to react quickly is to actively keep a pulse on the economic factors and put yourself in the best position to respond to the market. With the real estate market it’s never about timing the market but time in the market. 

From industry executives to millennials purchasing their first home, I offer extensive experience with property investment and management. To stay up-to-date with the ever-growing Toronto Real Estate market, tune into my weekly pulse seminar to stay informed! If you have any questions, feel free to send me a message at hello@deniswu.com

 – Denis Wu, Toronto Real Estate Agent