What Impact Will COVID-19 Have On The Housing Market?

The last several weeks have seen economic and social changes like never before. The COVID-19 pandemic and the resulting economic impacts have caused many people to wonder what the effect might be on the housing market in Canada. 

We asked Properly, a real estate technology company with experience following and understanding housing markets across Canada, some questions about the housing market.

What Are You Seeing in Markets Across Canada?

The COVID-19 pandemic has resulted in potential home buyers and sellers responsibly practicing social distancing and delaying plans to buy or sell, leading to an overall decline in real estate market activity across the country.

What is Happening to Real Estate Activity?

We've observed a steep decline in sales volumes and real estate activity, including home showings and open houses. Home showings in Ontario are down 72% since early March (source). In Toronto, sales volumes are down 73% over last year and this decline is fairly consistent across the Greater Toronto Area (source). Across the country in Calgary, home sales are down 78% since social distancing measures were put into place around March 15th.

Have Home Values Dropped?

Unlike sales volumes, home values typically move more slowly in response to shocks. We expect the timing and magnitude of the impact on home values to depend on the duration of the social distancing period, the depth of the resulting economic recession, and the nature of government stimulus programs.

We haven’t seen major home value declines so far. In Toronto, average sale prices are down 1.5% in the first half of April relative to a year ago (source). In Calgary, where there has been a dual-impact from COVID-19 and declining oil prices, average prices are down 4.3%.

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What Other Factors Should Borrowell Members Consider?

Overall economic conditions will have a sustained impact on local real estate markets. As mentioned, the ongoing shock to oil prices is adding a new layer of uncertainty into the equation given Canada’s dependence on oil extraction.

Oil-producing regions of Canada, particularly Alberta, Newfoundland & Labrador, and parts of Saskatchewan, are the most at risk for significant price declines given the dual-impact of an oil price shock and pandemic-fuelled economic recession. Here’s what we’ve seen historically: in the year following the 2014 Oil Shock, Calgary home sale volumes declined 26% and prices declined 2.7%; during the 2008 shock and Great Recession, sales volumes declined 35% and prices declined 6%.

On the economic front, surging unemployment and over 10% of mortgage holders (500,000 homeowners as of early April) are requesting a deferral of their mortgage payments (source). If this is a result of people being unable to afford to make mortgage payments, it could be a signal of potential forced selling in the future, which could drive down home values.

When Will the Housing Market Rebound?

There is historical precedent for fast recovery following epidemics. During the 1918 influenza and SARS, economic activity and real estate sales fell sharply during the epidemic, with a less sustained impact on home values. In these cases, the market quickly recovered to previous levels following the epidemic.  Sources indicate a similar pattern in China during COVID-19, with real estate activity rebounding from near zero to 50-75%+ of prior-year levels in the weeks since the cessation of quarantines and control measures (source). 

In Canada, the mandated and necessary social distancing measures are resulting in unprecedented declines in business activity and increases in unemployment. As a result, we expect that the recovery from COVID-19 will take longer than what was experienced after previous epidemics. 

Can you Tell Us What Happened During the 2008 Great Recession?

The 2008 Great Recession provides a reasonable benchmark for tracking what might be in store for Canadian real estate as a result of the COVID-19 recession.

During a recession, lower income levels and higher unemployment reduce purchasing power and demand, and homeowners’ impaired ability to cover their ownership costs results in forced selling and increased supply. This imbalance typically results in a spike in available inventory followed by a reduction in average sale prices. 

Toronto and Vancouver saw meaningful declines in benchmark home prices over the three months ending February 2009, Toronto saw prices decline by 5.4% and Vancouver saw prices decline by 7.4%. Between August 2008 (the peak) and April 2009 (the trough), Toronto benchmark prices declined 11.3%. (source)

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Diving deeper into the parts of the housing market that were most impacted, using Calgary as an example, we can see that the Great Recession hit certain segments of the market harder than others (source).

• Expensive Homes (home values above the median in the community) experienced a 45% declines in sales volume, whereas less expensive homes only saw 26% declines – during more challenging times, buyers gravitate towards more affordable homes

• Older Homes (homes more than 30 years old) experienced the most significant declines in home values – buyers prefer homes that require less upkeep and maintenance

Homes with the widest appeal are most likely to hold value during a market shock. Unique homes, highly expensive homes, homes backing multi-family complexes or otherwise with a less desirable location will generally experience the largest price declines.

What Happens Next?

While technological solutions such as virtual tours may help some urgent buyers find their next home, we expect most buyers to delay purchases. Many buyers want to see a prospective home in-person to get a feel for the space and condition and open houses have been banned across most of Canada. Further, many buyers are nervous about making offers given fears (or hope) that home prices may decline in the near-term, and less urgent sellers are hopeful that market conditions will improve and so are delaying their sale timeline.

As the behaviour of buyers and sellers interact with the broader economic fall-out of COVID-19, we expect average home prices to fall in local markets across Canada. The extent and timing of this decline will depend on various factors. We will continue to monitor housing markets across Canada and will provide updates as the situation evolves.

Properly is simplifying the process of buying or selling a home in Canada. Homeowners can sell their existing home directly to Properly, avoiding the hassles of listing, and can work with Properly to find and purchase their dream home. Properly also offers Canada's most accurate home valuation report - homeowners get a free assessment of their home’s value that is always up-to-date. Properly was founded in 2018 and currently operates in Calgary and Ottawa, with expansion to Toronto and other cities planned in the coming months.